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Couche-Tard Eyes 7-Eleven: Is a ‘Cheap’ Stock the Real Driver?

All copyrighted images used with permission of the respective Owners.

Participants taste onigiri at a product meeting for 7-Eleven Japan in Tokyo on Jan. 23, 2024. Staff and suppliers gathered to discuss flavors, textures and fillings for the Japanese riceballs, one of 7-Eleven’s most important products, with more than 2 billion sold each year.

Noriko Hayashi | Bloomberg | Getty Images

Alimentation Couche-Tard’s (ACT) proposal to buy out 7-Eleven’s owner, Seven & i Holdings Co., was likely driven by the Japanese company’s affordability as a stock, compared to global counterparts, according to Richard Kaye, portfolio manager at independent asset management group Comgest. Kaye believes that Seven & i Holdings’ core business, which revolves around the iconic 7-Eleven convenience store chain, already operates at a high level and doesn’t offer much room for improvement. The Circle K operator offered to acquire its Japanese rival last month. The amount has not been disclosed, but should a deal go through, it could be the biggest-ever foreign takeover of a Japanese company.

On Friday, U.S. fund Artisan Partners Asset Management urged Seven & i Holdings to “seriously consider” the buyout offer and solicit offers for the company’s Japanese subsidiaries “as quickly as possible.”

The offer comes amidst restructuring within Seven & i Holdings, aimed at growing 7-Eleven’s international presence and divesting its underperforming supermarket business. Artisan Partners Asset Management contends that ACT is uniquely positioned to enhance Seven & i’s corporate value. “Negotiating with ACT is the best tactic to preserve positive stakeholder outcomes in Japan,” they asserted in a letter to Seven & i.

Kaye, however, disagrees with such sentiment. In an interview on CNBC’s “Squawk Box Asia,” he expressed, “I don’t think there’s a case for a radical reform to be to be done by a foreign acquirer.”

He praised Seven & i Holdings for its exceptional performance in logistics and product innovation. “I think it’s very hard to assume that that could be done an awful lot better,” he added. While Kaye acknowledges that Seven & i Holdings could accelerate reforms in its other segments, such as its general merchandise stores, he emphasizes that these businesses do not significantly detract from the company’s profit margins or capital return.

“What [ACT] probably sees is a cheap stock, if I can be very frank.”

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Seven & i Holdings is currently trading at a 27.96 price-to-earnings ratio and has a price-to-book ratio of 1.47, according to LSEG data. ACT operates about 16,700 stores globally, significantly fewer than Seven & i Holdings’ approximately 85,800 stores. However, the Canadian firm commands a higher  valuation of $54 billion as of Monday’s market close, compared with the Tokyo-listed company’s 5.26 trillion yen, or $38.3 billion.

Regulatory Hurdles

The proposed deal is anticipated to face anti-trust scrutiny in both the U.S. and Japan, particularly in the U.S., as a retail analyst recently told CNBC. Bryan Gildenberg, managing director at Retail Cities, stated, “I would imagine that there’s going to be some regulatory concern and some required divestment in order to make this [deal] work.”

Bloomberg reported on August 27, citing people familiar with the matter, that Seven & i was seeking designation as a “core” company under Japan’s Foreign Exchange and Foreign Trade Act. This designation requires Japan’s finance ministry to vet any entity seeking to acquire more than a 10% stake in a “core” company.

Such companies include those in sectors like aerospace, nuclear energy, and rare earths. Seven & i’s move signals a concern that an ACT buyout could potentially harm its “very carefully designed, decades honed, very unique konbini business model, which 7-Eleven has developed in Japan and is now sort of re-exporting to the U.S,” Kaye explained.

Konbini is a Japanese term that refers to the nation’s ubiquitous convenience store model.

Despite the potential challenges, Kaye views the stock as a “buying opportunity” within the Japan-listed universe, which includes global companies such as Fast Retailing and Pan Pacific International Holdings, which runs the Don Quijote chain. He highlighted that these are “companies which are doing great operations even on a global basis, but they’re cheaper than global counterparts.”

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Key Takeaways

  • Alimentation Couche-Tard’s (ACT) offer to acquire Seven & i Holdings Co. may be driven by the Japanese company’s undervalued stock compared to global peers.
  • Richard Kaye, portfolio manager at Comgest, believes that 7-Eleven’s core convenience store business is already highly optimized and offers limited room for improvement.
  • Artisan Partners Asset Management, a U.S. fund, advises Seven & i Holdings to consider ACT’s offer and explore potential sales of its Japanese subsidiaries.
  • The proposed acquisition is expected to face scrutiny from antitrust regulators in both the U.S. and Japan, especially concerning potential market dominance in the convenience store sector.
  • Seven & i Holdings’ pursuit of ‘core’ company designation in Japan underscores its concern that an ACT takeover could disrupt its established konbini model.
  • Kaye views Japanese companies like Seven & i Holdings, Fast Retailing, and Pan Pacific International Holdings as undervalued investments despite their strong global operations.

A Look at the 7-Eleven Phenomenon

The 7-Eleven brand symbolizes convenience and reliability in Japan. The konbini model, a Japanese concept of ubiquitous, always-open convenience stores, has become synonymous with 7-Eleven’s presence. Besides offering a wide variety of food and beverages, these stores provide essential services like bill payments, ATM access, and package delivery.

The 7-Eleven network in Japan operates with an impressive level of efficiency. Logistics systems ensure a constant flow of fresh products, while meticulous attention to detail guarantees a consistent customer experience across all locations. As such, 7-Eleven has become an integral part of everyday life in Japan, serving as a central hub for communities.

Analyzing ACT’s Interest: A Strategic Perspective

While ACT’s offer appears to be motivated by Seven & i Holdings’ affordable stock price, the bigger picture suggests a strategic play for expanding into the lucrative Asian market.

Here’s a closer look at why ACT might be interested in acquiring Seven & i Holdings:

  • Market Entry and Expansion: Japan’s convenience store market is a highly profitable and saturated market. By acquiring Seven & i Holdings, ACT gains immediate access to a well-established network with strong brand recognition, avoiding the time and resources required to build a similar footprint from scratch.
  • Leveraging the Konbini Model: The konbini model has proven incredibly successful in Japan. ACT could leverage this model to expand its presence across Asia, introducing the 7-Eleven brand to new markets.
  • Global Scale and Synergy: Acquiring Seven & i Holdings would significantly enhance ACT’s global scale, allowing for potential cost-saving synergies in areas like logistics, procurement, and technology.

The Regulatory Landscape and Potential Challenges

Antitrust concerns are a major hurdle for ACT’s acquisition proposal. Regulators will likely scrutinize the potential market share consolidation and possible impact on competition, especially given 7-Eleven’s dominance in the convenience store industry.

Seven & i Holdings’ strategy to seek ‘core’ company designation in Japan further complicates the situation. This designation triggers stricter scrutiny by the government and could delay or even block the deal if deemed to impact national interests.

What’s Next for Seven & i Holdings?

The future of Seven & i Holdings hangs in the balance. While ACT’s offer represents a significant opportunity, it remains unclear if the acquisition will proceed.

Seven & i Holdings could explore alternative strategic options:

  • Negotiating with ACT: The company could enter negotiations to strike a deal that safeguards its core konbini business and addresses regulatory concerns.
  • Seeking Alternative Buyers: Seven & i Holdings could solicit offers from other potential buyers.
  • Continuing its Restructuring: The company could pursue its own restructuring plan, divesting underperforming businesses while focusing on its core convenience store operations, potentially exploring new international markets on its own terms.

The decision facing Seven & i Holdings is crucial. The company’s response will shape the future of 7-Eleven in Japan and beyond.

Article Reference

Sarah Thompson
Sarah Thompson
Sarah Thompson is a seasoned journalist with over a decade of experience in breaking news and current affairs.

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