A customer shops in a 7-Eleven convenience store in Tokyo in August, 2024.Kim Kyung-Hoon/Reuters
Big profit declines at Seven & i Holdings SVNDY are ratcheting up pressure on the parent of 7-Eleven to engage in talks with Canadian convenience-store giant Alimentation Couche-Tard Inc. ATD-T over its US$47-billion takeover offer.
Seven & i on Thursday reported a 35-per-cent year-over-year decline in net profits for the six months ended in August. The company also cut its full-year profit forecast to 163 billion yen (US$1-billion), from 293 billion yen previously, just one day after Couche-Tard was revealed to have sharply raised its offer for Seven & i.
In response to years of shareholder pressure, Seven & i also announced plans to refocus on its core business of more than 80,000 convenience stores. The plan involves spinning off 31 of the company’s other businesses – which range widely from supermarkets to a baby-goods store chain, a bank, and even the Denny’s restaurant chain in Japan – into a new company called York Holdings. In addition, Seven & i plans to change its name to 7-Eleven Corp.
“We would think that [Couche-Tard] would only be emboldened by today’s events,” Tyler Tebbs, head of research company Tebbs Capital, said in a Thursday note to clients. “Today’s events feel like an act of desperation and should put further pressure on the board to engage” with Couche-Tard, he said.
7-Eleven owner to cut assets and refocus on convenience stores to counter Couche-Tard takeover
The changes amount to the largest transformation Seven & i has undergone since first bringing the 7-Eleven brand to Japan in the 1970s. San Francisco-based ValueAct Capital Management LP, which owns roughly 4.4 per cent of Seven & i and has been calling for those exact changes since first investing in the company in 2020, did not respond to a request for comment.
Speaking to investors on Thursday, Seven & i president Ryuichi Isaka said the company had been “slow to respond to the changes in the environment and [has] caused great trouble in terms of our business performance.”
On Wednesday, Seven & i received a revised takeover bid from Couche-Tard that a source familiar with the matter said was worth US$18.19 a share, up 22 per cent from the initial US$14.86-a-share offer made in August. The Globe and Mail is not identifying the source because they were not authorized to speak publicly on the issue.
The latest offer values the Japanese company at roughly US$47-billion, which, if accepted, would constitute both the largest-ever foreign takeover of a Japanese company as well as the biggest of more than 75 acquisitions Couche-Tard has made since the company was founded in 1980.
Financing such a gigantic transaction would be a challenge, particularly given Couche-Tard has pledged to get any potential deal done entirely in cash.
According to RBC Capital Markets analyst Irene Nattel, Couche-Tard could take on US$19-billion in debt, without exceeding its previous borrowing levels as measured by the ratio of debt to earnings, to fund a possible deal. That debt level suggests Couche-Tard would need to sell about $38-billion in stock, according to Globe and Mail calculations.
That is likely Couche-Tard’s “upper limit on price,” BMO Capital Markets analyst Tamy Chen said in a note to clients on Wednesday. “Any more and the financing required looks even more difficult.”
“ATD’s revised offer is much closer to where we suspect Seven’s board is on price, but it may still fall short,” Ms. Chen said.
Asked on the Thursday call with investors whether splitting into two companies will ultimately create more value for shareholders than accepting Couche-Tard’s buyout, Mr. Isaka said he believed it would.
“We need to get back on track with our recovery process,” he said. “Along with growth, capital efficiency will also need to be addressed in running the business. That will create the value better and stronger than that proposed by Couche-Tard.”
Although Seven & i said in its statement Wednesday that it is in “current discussions” with Couche-Tard, the source said no substantive negotiations have taken place since the higher offer was submitted.
As recently as Sept. 9, the Japanese company was refusing to engage with Couche-Tard, even on the external adviser-to-adviser level, and also rebuffed an offer to sign a non-disclosure agreement that would have allowed both sides to share information.
However, after the weaker-than-expected results that Seven & i announced Thursday, Mr. Tebbs said the company will need to show more tangible results before its May, 2025, annual general meeting if it hopes to continue avoiding any engagement with Couche-Tard.
“We would be unsurprised if various investor groups are threatening challenges to management and the board at the next AGM should there be no engagement,” Mr. Tebbs said.