A customer looks at their phone inside a 7-Eleven convenience store in Tokyo, Japan on Aug. 19. Analysts say Couche-Tard will need roughly US$40-billion to close its aquisition of Seven & i.Kim Kyung-Hoon/Reuters
Alimentation Couche-Tard Inc.’s blockbuster deal for the parent of rival 7-Eleven could translate into a massive investment opportunity for the country’s largest pension plans and an answer to pointed criticism of the funds over their lack of support for domestic companies.
Couche-Tard Inc. ATD-T is in talks to acquire Tokyo-based Seven & i Holdings Co. Ltd. SVNDY In banking circles, the question is how the Montreal-based retailer plans to pay for what would be the largest foreign takeover of a Japanese company.
There is a template in place, courtesy of a transatlantic deal three years ago that saw three of the country’s largest public-sector funds vault insurer Intact Financial Corp. onto the international stage.
If Montreal-based Couche-Tard’s negotiations with Seven & i result in a friendly transaction – and that’s a big if, as the Japanese company turned down past advances – analysts say the Montreal-based convenience-store operator will need roughly US$40-billion to close the deal. The company has US$2-billion of cash and can borrow up to US$20-billion without blowing up its investment grade credit rating.
The rest of the money will likely come from issuing stock and preferred shares. Analysts say Couche-Tard will need to raise approximately US$18-billion in equity. This is potentially the largest stock offering ever seen in domestic capital markets, by a country mile.
As an aside, the arbitrage fund crowd trading Seven & i and Couche-Tard shares in anticipation of a deal speculate there is a 20-per-cent price gap between Couche-Tard’s offer and the Japanese company’s asking price. That’s significant but surmountable.
Tokyo Stock Exchange-listed Seven & i shares traded at 1,800 yen prior to the revelation of discussions last Monday. Fund managers and analysts say Couche-Tard likely opened talks with a 2,400-to-2,500 yen bid, while Seven & i’s board will want a premium in the 2,900-to-3,000 yen neighbourhood. This is all market chatter – other than confirming talks, the two companies are staying silent on terms of a deal. On Monday, Seven & i shares closed at 2,038 yen.
How does Couche-Tard tap equity markets for an unprecedented amount of cash? It would start by reaching out to the country’s largest pension plans. And these fund managers would face political pressure to take Couche-Tard’s call.
Over the past year, Peter Letko and Daniel Brosseau, the co-founders of Montreal-based fund manager Letko, Brosseau & Associates Inc., waged a campaign aimed at forcing the public-sector plans such as the $646-billion Canada Pension Plan Investment Board (CPPIB) to invest more in domestic companies. The two executives say domestic pension plans, with trillions in assets, put just 4 per cent of their money into publicly traded Canadian stocks.
Last March, as part of their lobbying, Mr. Letko and Mr. Brosseau convinced 90 business leaders to sign an open letter of support for greater domestic investment. Couche-Tard co-founder and chairman Alain Bouchard was one of the executives to lend his name to the cause.
Federal Finance Minister Chrystia Freeland proved receptive to the concept. In the last federal budget, she committed former Bank of Canada governor Stephen Poloz to spending his summer determining what, if anything, the pension funds should do differently.
To win pension-fund backing, Couche-Tard’s bold takeover would need to make business sense. That is a relatively easy bar to clear, as a retailer with a four-decade track record of successful acquisitions. Couche-Tard is already a core holding for most of the country’s largest funds.
Committing serious capital to Couche-Tard would also parry accusations the pension plans don’t do enough to support the Canadian economy.
If Couche-Tard does go looking for money, it will get a warm reception from the Caisse de dépôt et placement du Québec, a long-time shareholder and, by virtue of its mandate, a champion of businesses based in la belle province. The Caisse oversees $425-billion in assets.
In 2020, the Caisse teamed with CPPIB and the Ontario Teachers’ Pension Plan to back Intact’s audacious $12.4-billion bid for British rival RSA Insurance Group PLC. The three funds stepped up for $3.2-billion of subscription receipts – securities which flipped into Intact common shares once regulators signed off and the RSA acquisition closed.
With a massive lead order in place, investment banks sold another $1.25-billion of Intact subscription receipts to public investors. Intact’s stock price is up 75 per cent since acquiring RSA.
The Caisse and other pension funds say it is too early to comment on a potential investment in Couche-Tard, as no deal has been reached with Seven & i. However, fund managers with billions to invest would welcome a call from Montreal. Couche-Tard’s ambition of owning the world’s largest convenience store chain checks all the boxes for the country’s pension plans.