Canada’s Alimentation Couche-Tard has launched a takeover bid of Japan’s 7-Eleven, the iconic convenience store that sells everything from unique culinary delights to clothes, children’s toys and banking services.
The takeover of the company – potentially Japan’s largest by a foreign buyer – heralds a shake up in corporate Japan and a turning point for dealmaking that will test Japan’s enthusiasm for other foreign companies to snap up some of its best-known brands.
M&A bankers and lawyers also believe it fires the starting gun on other investors hunting out rich pickings from the country’s unwieldy conglomerates where stagnant share prices flag the potential to extract value and initiate change from a swathe of undervalued brands.
The Canadian bid also follows off the back of Japan’s recently revised M&A guidelines, which encourage companies to take M&A offers seriously and give proper weight to implications for shareholders. Elsewhere the Tokyo Stock Exchange, leading calls for stronger governance, is demanding listed companies take “action to implement management that is conscious of cost of capital and stock price.”
This new regulatory pressure is designed to improve underperforming companies, lift valuations and improve capital efficiency. The aim to get Japanese companies to put shareholder interests first could also help break down companies long-held resistance to being acquired.
Other factors are also in the mix. The Japanese yen’s weakness against the US dollar and other major currencies is helping to make companies like Seven & i, the Japanese operator of 7-Eleven, affordable.
Seven & i has a larger global network of almost 85,000 stores, but analysts point out that earnings are almost entirely generated from the 21,000 outlets in Japan, the 13,000 in the US and roughly 600 under its subsidiaries in China.
Analysts say Couche-Tard is primarily interested in the Japanese company’s store network in the US, opening the possibility that a deal might split Seven & i and leave a Japan- and Asia-focused business available for separate acquisition.
Fight back
For now, Seven & i Holdings (current market valuation US$36bn) has begun to defend itself. One strategy includes trying to persuade the government to change the company’s designation from a “non-core” to a more protected “core” rating under Japan’s Foreign Exchange and Foreign Trade Act (Fefta) according to reports in the Financial Times and Bloomberg.
If it were able to convince the government to upgrade its status as “core” Couche-Tard’s bid would have to be approved by the finance ministry. Previously, the government has granted this status to companies in the semiconductor and nuclear industries.
Seven & i was a conglomerate with 180 group companies spanning banking, insurance, petrol sales, freight transport and agriculture. Businesses that also might provide grounds for greater regulatory scrutiny of a foreign bid.
“In Japan, elections are imminent, as in the US. It’s the witch’s brew of politicians and unions that curdles milk, makes noses bleed and ices business deals from half a world away. Get popcorn, this is going to be a gladiatorial combat to watch. It could just change Japan’s legal infrastructure forever – for the better,” says Nicholas Smith, Japan strategist at CLSA Securities.
