Japan’s Seven & i Holdings, which operates 85,000 stores, said it had received a bid from Circle K operator Alimentation Couche-Tard.Eric Thayer/Getty Images
Alimentation Couche-Tard Inc. ATD-T founder and chairman Alain Bouchard is an avid fisherman and often evokes his passion for the sport to describe his approach to mergers and acquisitions – a strategy that has made him a billionaire and transformed the company into a global retailing giant. But even he would admit that his play for Japan’s Seven & i Holdings SVNDY will require the monster of all angling efforts.
“I put some lines in the water,” he told The Globe and Mail in a 2016 interview. “Every now and then I pull in a small one but sometimes a big one.” You have to work longer and harder to reel in the big fish, and not cut bait, he said.
The Quebec entrepreneur has for years had his eye on Seven & i, owner of the 7-Eleven convenience store chain, but the timing never seemed ripe for a deal. Now, new takeover rules in Japan requiring companies to more seriously consider offers have changed the game and provided a more favourable backdrop for transactions. And yet, people who have worked with Mr. Bouchard on deals in the past say privately that the odds are still stacked against him.
So far, Seven & i hasn’t bitten the hook. If it does, Mr. Bouchard will likely be in for the effort of a lifetime. This isn’t just another Couche-Tard takeover attempt. It dwarfs any of the six major acquisitions the company has completed since 2003 – both in terms of the price it will need to pay and the resources it will need to muster to get it done. In fact, it would be more than twice as big as all of them combined.
Buying Seven & i would be the largest-ever takeover of a Japanese company, requiring what would be by far the largest equity issuance in Canadian history. It will test Mr. Bouchard’s resolve and deal-making skills like no other previous takeover has, requiring him to convince his Japanese rival that they’re better off together than apart. It might take months or even years to get an agreement done, and maybe years more to see if it was all worthwhile.
“It’s a clash of titans in this industry,” said Jason Del Vicario of Hillside Wealth Management in Vancouver, which holds a sizable position in Couche-Tard among its $250-million in assets under management. “I’d say [the Japanese] are a little bit insulted by this cowboy Canadian making an offer for their national treasure. But at the same time, people in the financial world in Japan and outside Japan are really interested to see what’s going to happen here.”
Laval, Que.-based Couche-Tard has made an unsolicited, all-cash offer of US$39-billion for Seven & i, a takeover approach confirmed by the two companies last month. A special committee of Seven & i directors has rejected the non-binding bid, worth US$14.86 a share, as too low and “opportunistically timed” but said the company would be willing to enter talks if Couche-Tard came back with a proposal that recognizes its stand-alone intrinsic value and addresses regulatory concerns.
Any takeover attempt faces significant hurdles, including financing, approval from antitrust authorities and blessing from the Japanese government. But first, Couche-Tard, which wants to do a friendly deal, has to make an offer that gets it in the door. Its initial volley was considered easy to rebuff by analysts. While the bid, worth about 2,150 yen at current exchange rates, is a premium of about 22 per cent to Seven & i’s stock price prior to the disclosure of the approach, it’s still below the 2,230 yen the shares were trading at in late February.
Still, the offer has lit a fire under Seven & i, putting pressure on the company to outline how it intends to improve its share price. “Seven & i’s response starts the clock for its management and the board to demonstrate how they plan to deliver more value than was offered by Couche-Tard,” Ben Herrick, an associate portfolio manager at Artisan Partners’ International Value Team, which has held Seven & i shares since 2019, said in e-mailed comments. “The time for the company to show us its cards is now.”
Some arbitrage players and market participants watching the developments closely estimate that it will take an offer of US$17 a share to get the Seven & i board to engage. That’s a 14-per-cent increase from the current bid. It would likely take even more to get a deal past the finish line.
“Owning Seven & i would create tremendous value for Couche-Tard. It is a must-get deal in our view,” Macquarie Group analysts Natsuko Douglas and Damian Thong said in a research note, highlighting several benefits, including winning ownership of the 3,800-store Speedway chain in the United States and access to Seven & i’s supply-chain network.
How high Couche-Tard will go, though, remains to be seen. The company is a disciplined acquirer, never paying a multiple higher than 10.4 times earnings before interest, taxes, depreciation and amortization (EBITDA) for a major acquisition and typically clinching deals below that level. One exception was the smaller US$360-million purchase in 2020 of Convenience Retail Asia in Hong Kong, done at 13 times, according to Veritas Investment Research.
The current offer price is about nine times Seven & i’s EBITDA for fiscal 2023, and the implied multiple on the Japanese company’s North American convenience business is 11 times, which would be at “the high end” of transaction multiples for Couche-Tard, says Desjardins analyst Chris Li.
Combining Couche-Tard with 7-Eleven would generate cost-savings and synergies, however, on things such as buying gasoline for their service stations. Mr. Li estimates these could be worth US$2-billion and achievable over four years, which would then bring the current transaction multiple more in line with past Couche-Tard deals. He says proceeds from asset divestitures that regulators might require could generate US$9-billion.
Other analysts are making their own projections.
Irene Nattel at RBC Capital Markets points out that Couche-Tard has repeatedly stated that it has the means to take on US$10-billion of debt on its balance sheet. She calculates that if Couche-Tard stretches its adjusted net-debt-to-EBITDA ratio to four (the maximum it has ever gone is 3.6), it would have a debt capacity of US$19-billion to fund a deal when building in Seven & i’s earnings contribution. Then it would still need to find US$20-billion through equity financing or other means, not factoring in any additional takeover premium or cost-savings from the combined companies’ operations.
Assets such as Seven & i command a higher price because of their scarcity, said Greg Taylor, chief investment officer of Toronto-based Purpose Investments, which holds Couche-Tard shares. “I think it is probably going to be one of those things where you have to plug your nose and overpay a bit and hope that it works out in the long run.”
Couche-Tard and its advisers have started feeling out Canadian pension funds and other investors to gauge their interest in backing its bid with financial support, though it’s not clear how advanced these talks are. Based on what it called “substantial work and preparation” on a potential takeover of Seven & i so far, the Canadian retailer said earlier this month that it is confident it has the means to finance the deal in cash and that financing would not be a condition to closing. Goldman Sachs is working with the company as an adviser.
The sheer scale of the potential equity raise required is mind-boggling. Canada’s biggest equity offering on record is Enbridge Inc.’s $4.6-billion (US$3.4-billion) stock sale in September, 2023. The Calgary-based utility raised the money to acquire U.S. natural gas pipelines in a bought deal financing.
Couche-Tard might need to raise five times as much to buy Seven & i. Every 1-per-cent premium it pays beyond Seven’s current market value requires about $500-million in additional equity, according to The Globe’s calculations.
A key risk in any share sale is the dilution it might create for the chairman and Couche-Tard’s other three founders. Raising US$20-billion in equity would take their stake from 25 per cent to about 18 per cent, according to The Globe’s calculations. That makes it imperative that they choose the right backers.
A Couche-Tard spokesman declined to comment on their intentions.
In 2021, the founders relinquished the dual-class share structure that gave them voting control of the company. With the support of friendly shareholders such as the Caisse de dépôt et placement du Québec, they have since maintained what Mr. Bouchard has called “a blockage type of group” against an unwanted takeover.
Mr. Bouchard grew up living in a trailer with five siblings and climbed from poverty to become one of Canada’s richest men. Now at age 75, he has a chance to redraw the competitive landscape in global convenience-store retailing and cement his legacy. This is one trophy fish he probably won’t want to let get away.
With files from Jameson Berkow, James Bradshaw, David Milstead and Andrew Willis