SEVEN & i Holdings is embarking on its biggest-ever overhaul, betting that a bold breakup will help fend off an unsolicited takeover proposal from a smaller rival and make up for a sluggish profit outlook.
“We are going to speed up our transformation,” chief executive officer Ryuichi Isaka said in his first remarks since a buyout approach from Canada’s Alimentation Couche-Tard became public in August. Seeking to restore profitability and focus more on convenience stores, Isaka laid out a major revamp: “This plan is designed to bring out our strengths and achieve greater growth.”
Seven & i essentially unveiled a plan to split in two: One business would be focused on 7-Eleven, convenience stores and petrol stations, and the other would be a collection of 31 less profitable retail operations that might bring in strategic partners and eventually be listed separately. The big question is if the move will be enough to win over any investors warming to Couche-Tard’s approach.
The potentially problematic backdrop to potential deal negotiations is that Seven & i’s core convenience store business is weakening, and it is unclear if the retailer, which will also rename itself 7-Eleven – has a plan to address that.
The operating profit outlook for the 12 months to the end of February was cut to 403 billion yen (S$3.5 billion) on weaker convenience-store sales, falling short of a prior forecast for 545 billion yen and analysts’ average projection of 524 billion yen. Inflation is hitting spending among mid and low-income shoppers, especially in the US, the company said.
Isaka said Seven & i will keep a minority stake in the retail business that will be split off and called York Holdings. An investor relations day is being planned for Oct 24 to provide more details on the initiative.
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Operating profit for the latest quarter that ended in August fell 20 per cent to 128 billion yen, on net sales of 3.3 trillion yen. One bright spot was that the retailer, which operates more than 85,000 stores across the globe, raised its sales forecast for the full year, to 11.9 trillion yen from 11.3 trillion yen on stronger economic conditions and new retail initiatives.
Whether the disappointing numbers and outlook will make it harder for Seven & i to push back against Couche-Tard’s takeover proposal, even with the radical changes designed to bring more focus to the core convenience-store business, remains to be seen.
“There was not a story strong enough to convince investors that the company can improve deteriorating performance,” said Ikuo Mitsui, fund manager at Aizawa Securities, adding that it would have been better if Seven & i had presented a plan to boost sales, rather focusing mainly on profitability.
The fresh initiatives come after the Canadian operator of Circle-K stores sent Seven & i a new potential acquisition price of seven trillion yen last month, people with knowledge of the matter said this week. That is 20 per cent more than the prior indicated offer, and a 50 per cent premium from where the shares were trading at in mid-August.
Many investors are currently attracted to the proposed buyout price, and a stronger growth strategy will be “necessary to attract any new buyers”, Mitsui said.
Asked about the approach, Isaka said that Seven & i would refrain from speaking about any discussions, on the request of Couche-Tard, and listen to shareholders on any proposals that would lead to greater corporate value.
Seven & i’s shares fell less than 1 per cent to close at 2,325 yen on Thursday (Oct 10), well below Couche-Tard’s indicated offer price of US$18.19, or 2,709 yen, per share. Apart from potential swings in the yen that could change the value of any potential deal, Seven & i has cited regulatory issues as a potential hurdle that has not yet been addressed.
The saga is being seen as a key test of whether corporate Japan, long considered impenetrable for inbound mergers and acquisitions, is ready for change. An acquisition of Seven & i would mark the biggest-ever takeover of a Japanese company.
Since Couche-Tard’s approach became public, Seven & i sought, and received, a designation of being a core business essential to national security, a step that was seen as an attempt to make it harder for a foreign entity to take over the company. Even so, Japan’s finance ministry has played down the idea that the designation would make any buyout difficult.
For years, Seven & i has faced calls from investors to focus more on its convenience store business. ValueAct Capital Management has argued that the Japanese retailer should be worth more than it is now – six trillion yen – without a conglomerate discount. Couche-Tard has a market value of US$51 billion, about US$10 billion more than Seven & i.
Regardless of how talks between Couche-Tard and Seven & i play out, Japan will probably see even more merger activity, thanks to improved governance, market regulators pushing to boost value and clearer guidelines on corporate mergers.
“This is the first of many that are going to come,” said Zuhair Khan, who runs a long-short fund at Union Bancaire Privee that invests in Japanese businesses based on the quality of their corporate governance.
Seven & i originated as a clothing store a century ago and evolved into a general merchandiser, selling everything from groceries and sundries. After bringing 7-Eleven shops and Denny’s restaurants to the country in 1974, the convenience store concept turned out to be transformational for the company, which later took over the entire chain and embraced it as part of its name. BLOOMBERG
