Foreign takeover bid for Japan’s 7-Eleven owner is a watershed moment for the country’s corporate sector

For the vast majority of my career, Western companies have hesitated when faced with Japanese acquisition targets, even when valuations were compelling. The most common concern has been a lack of understanding when it comes to Japan’s corporate culture and informal governance practices.

Whilst many aspects of this culture have long been revered, the perceived risk of owning and integrating companies governed by such customs has historically trumped the valuation appeal.

So is this foreign bid for Seven & i a one-off, or might we see more “out-in” M&A (merger and acquisition) deals like this? I suspect the latter.

Couche-Tard, which owns the Circle-K brand of convenience stores, has openly coveted Seven & i for many years. Is it a coincidence that the Canadian firm only made an unsolicited bid following meaningful upgrades in Seven’s governance structure? I doubt it. 

“Like many other Japanese companies today, Seven & i has attractive qualities for foreign buyers.”

Like many other Japanese companies today, Seven & i has attractive qualities for foreign buyers. Firstly, it is a high-quality, growing, global franchise that generates more revenue and profit outside of Japan than it does in its domestic market.²

Secondly, it is materially undervalued relative to both its private market value and its publicly listed global peers.

Lastly, its governance structures have, in recent years, moved more towards global best practice, making acquisition prospects less daunting to foreign buyers than in the past.

A new chapter for M&A activity

Japan’s governance regime, while still in need of improvement, has made tremendous strides in recent years. The upgraded institutional and legal framework surrounding Japanese corporate behaviour has clearly lowered barriers to “out-in” M&A.

Many Japanese companies with large, attractive global footprints, modest valuations and globally acceptable governance structures will be closely watching the Seven & i case.

In the West, and in the US in particular, corporate action is seen as the ultimate arbiter of listed-market value. If a company is too cheap vs its private market value, it eventually gets bought. In Japan, this has not been the case. Historically, there has been no market for corporate control.

We are all familiar with so-called Japanese “value-traps” – stocks that look attractively valued but are cheap for good reason – but that is changing.

Corporate reform in Japan has already sparked several years of record M&A activity, albeit from a low base. This has improved the market’s price-setting mechanism. However, the M&A boom has been mostly domestic. The missing part of the puzzle has been overseas acquirers. Couche-Tard’s bid opens this new chapter.

A litmus test for corporate reforms

Some commentators argue that if the bid fails, it will be a major setback for the pro-market reforms seen in recent years. This is not necessarily the case.

If the deal fails due to vested interests, excessive protectionism or governance failures, then yes, it would represent a setback.

If the deal fails due to unacceptable terms, such as valuations, the situation is different. The litmus test should be the process, not the outcome. So far, things are progressing relatively well on the process front.

The bid dynamics are playing out much as any Western-trained investor might expect; a game of “cat-and-mouse”, where the target tells the bidder the price is too low and to come back when they are serious.

Following the bid, Seven & I quickly formed an independent committee led by its independent chairman and other non-executive directors. This follows best-practice and is what should be expected from a well governed business.

Based on what we have seen so far, any failure will be due to price, structure, or regulation – not vested interests. Credit to the team at Seven & i for managing this process by the book, despite the discomfort it may have caused internally.

Will the bid succeed?

Alimentation Couche-Tard’s opening gambit was too low, as they likely knew. Seven & i, in my view, correctly dismissed the low-ball bid, but laid out a roadmap for Couche-Tard: raise the offer, provide thoughtful analysis how the takeover can navigate non-financial hurdles and then we’ll talk. The ball is in Couche-Tard’s court.

Couche-Tard’s valuation trades at a meaningful premium to Seven & i’s. Combined with substantial synergy potential, this puts Couche-Tard in a strong position to justify and fund an improved bid for Seven & i.

I suspect that a path through regulatory hurdles, whilst not straightforward, will exist if there is a will to find it. This doesn’t mean an improved bid will emerge, or indeed succeed. It means only that it might.

It would be atypical for the first bid to be the best and only offer. Whilst Seven has not exactly welcomed Couche-Tard with open arms, they have presented a blueprint for constructive talks. Whether or not this takeover succeeds, it seems likely we’ve only witnessed the opening act.

Potentially beneficial combination

I believe a fantastic opportunity exists in the potential combination of these two great companies. Leaving aside the specifics of the low-ball opening bid, Couche-Tard has created the possibility of forming a single company with an overwhelmingly dominant position across the entire global convenience-retail market. 

“The potential synergies from a friendly and collaborative merger are enormous.”

The potential synergies from a friendly and collaborative merger are enormous, with analysts estimating figures north of $2 billion – an outcome that would be unimaginable for either company on their own.

Other than price, concerns over clashing corporate cultures often gives CEOs cold feet in M&A scenarios. However, when reflecting on the development of both companies over the last fifty years, I am struck more by cultural similarities than differences.

Couche-Tard’s interest in Seven is not merely a competitive overture; it reflects recognition of shared values and accomplishments. Both companies grew from relatively humble beginnings to become global leaders in convenience retailing.

Both company cultures are deeply rooted in an entrepreneurial spirit focused on thrift, innovation, operational excellence and, above all else, customer satisfaction.

Alain Bouchard, the co-founder of the Couche-Tard conglomerate, acknowledges in the book “Daring to Succeed” that Seven has been a constant inspiration for him in building his own business. It is a great compliment that the strength of Seven’s business is so clearly appreciated by one of its largest competitors.

Alternative deal structure

Whilst I can see great potential in combining these two great businesses, I am not yet sure if a full takeover is the best outcome. The structure I’d like to see discussed is an all-stock merger between Couche-Tard and Seven’s international businesses.

With this approach, Seven & i would remain listed in Japan and continue to own its domestic operations, while 7-Eleven International would merge into Couche-Tard. Seven & i would receive shares in the new entity, likely owning around 40%, depending on the merger ratio.

With no cash required for the deal, Couche-Tard would avoid the need for expensive financing. Instead, the combined entity would have significant debt capacity, which could be used for buybacks or further growth. I expect the new entity’s market capitalisation could swiftly reach $100 billion to $120 billion, giving Seven & i’s stake a value of $40 billion to $50 billion – more than its current market cap.

This structure would circumnavigate some of the challenges associated with a full-blown takeover whilst still enabling massive synergy potential to be unlocked. This would benefit customers, as well as Seven and Couche-Tard’s shareholders. 

Regardless of the final structure, I strongly encourage Couche-Tard to improve its offer. This would bring Seven’s management to the table to fully explore the possibilities of a Seven-Couche-Tard combination. This could mark a transformational moment for both of these great companies.

The information provided should not be considered a recommendation to purchase or sell any particular security.
 

¹ BBC News 'Canadian retail giant makes £29.2bn takeover bid for 7-Eleven', August 2024
² Seven & I company website, July 2024 (7andi.com)

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.