SEVEN & i Holdings is set to report quarterly earnings at a critical time, with much of the focus on what it will say about restructuring and its profit outlook, after the Japanese retailer received a higher buyout offer from Alimentation Couche-Tard.
News has been trickling out over the past week suggesting that the owner of 7-Eleven is ready to restructure its business. The latest, by the Yomiuri newspaper, suggests that Seven & i may create a new holding company for its non-core assets and consider listing the unit while seeking outside investment.
Chief executive officer Ryuichi Isaka is facing pressure to show that the business can command a higher valuation. He will make his first public appearance since Couche-Tard approached Seven & i with a buyout proposal.
The Canadian operator of Circle-K stores is said to have sent a new offer to Seven & i in on Sep 19, raising the price by around 20 per cent to US$18.19 per share and bumping up its valuation to seven trillion yen (S$61 billion), Bloomberg news reported on Wednesday (Oct 9). The Japanese retailer earlier rejected Couche-Tard’s initial offer price of US$14.86 as being too low to even enter negotiations.
Seven & i also considering the sale of other retail operations including its original Ito-Yokado franchise and supermarkets, as well as part of its stake in Seven Bank, sources with knowledge of the matter said last week. Any steps may also help counter any pessimism stemming from a projected drop in operating profit for the latest fiscal quarter.
“They may also need to revise their outlook for the year,” said Takahiro Kazahaya, an analyst at UBS Tokyo, citing headwinds for the US and Japanese convenience stores. “If they can’t increase the value of the company by themselves and Couche-Tard’s offer remains high, there’s a risk that they will face greater pressure to accept.”
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Seven & i shares have climbed more than 30 per cent since the Canadian company’s buyout interest became public, yet are still trading below Couche-Tard’s new indicated offer. Shares in the company were mostly unchanged in early morning trading in Tokyo on Thursday.
A strong set of results would bolster management’s case for fending off Couche-Tard’s approach.
Analysts, however, project that Seven & i will report an operating profit of 143.5 billion yen for the three-month period to the end of August, down 10 per cent from a year earlier. Sales for the quarter are predicted to show a 5 per cent rise to three trillion yen. For the full year, analysts are projecting, on average, for the company to report an operating profit of 524 billion yen, below Seven & i’s own forecast for 545 billion yen.
Profits for Seven & i’s overseas convenience-store business, which includes the Speedway franchise, shrank by 80 per cent during the March to May quarter. That’s because it held back on raising prices as low-income shoppers cut back on spending due to rising inflation.
Domestically, sales at convenience stores open at least one year have been declining as 7-Eleven dragged its feet on cutting costs in the face of greater competition from FamilyMart, Lawson and other rivals.
Seven & i has approached private equity funds and other entities for its Ito-Yokado stores and supermarkets, sources familiar with the matter have said. Based on a multiple of six to eight times earnings before interest, taxes, depreciation and amortisation, the sale could fetch 320 billion to 430 billion yen, one of the sources said.
The sale of such retail assets, including part of the stake in Seven Bank, is part of a push to show a greater focus on the retailer’s convenience store business. ValueAct Capital Management has argued in the past that the Japanese retailer should be worth more than it is now – 5.6 trillion yen – without a conglomerate discount. BLOOMBERG
