Japan provides reality check for Couche-Tard's grand retail dream

Reuters

5 days ago

TOKYO, July 18 (Reuters) - Alimentation Couche-Tard's (ATD.TO), opens new tab attempt to create a global convenience store behemoth was set back when it pulled its $46 billion bid for Seven & i (3382.T), opens new tab, whose consumers in Japan have emotional ties to their purveyor of rice balls.
The Canadian company, which owns Circle-K, withdrew its bid on Thursday after a year-long pursuit, citing "a calculated campaign of obfuscation and delay" by the Seven-Eleven operator and lack of engagement by its founding Ito family.
Couche-Tard first disclosed the proposal in August last year, with Seven & i under pressure from shareholders to boost returns by selling off assets and focusing on its mainstay convenience store business.
"ACT bid at just the right time... when Seven was at its weakest," said Michael Causton of consultancy JapanConsuming.
The possibility of a takeover quickly sparked concern about whether the Seven-Eleven operator's fresh food would be affected. It also generated debate about Japan's openness to foreign takeovers.
Convenience stores are an important resource in Japan during natural disasters, but Seven-Eleven's massive global presence made it a target for Couche-Tard.
With Seven & i looking to avoid a takeover, it changed its self-reported national security category to "core" in September, a step which raised questions as to whether it was a defensive manoeuvre.
In private, it emphasised its importance to Japan's economic security to the government, three sources familiar with the matter said. Seven & i declined to comment.
The Canadian company hiked its proposal price in October, with Seven & i revealing plans to hive off assets the same month. The Japanese firm also announced plans to list its North America business.
"It has sparked the management into being more proactive," said Lorraine Tan, an analyst at Morningstar.
The company had expressed concerns about the regulatory hurdles to a deal.
"Couche-Tard seemed to want to iron out the details after Seven & i had agreed to the deal," said Travis Lundy, an analyst who publishes on Smartkarma.
Couche-Tard's approach appeared to gain a tailwind when an attempt by the Ito founding family to buy Seven & i collapsed in February after failing to secure funding.
Then, after initially providing little public explanation for pursuing the deal, Couche-Tard in March made a publicity push for the combination emphasising its financial credentials.
However, the Canadian retailer faced growing challenges including lacklustre retail spending in the U.S., with its stock price sliding between the end of last year and Wednesday's close.
"Couche-Tard may have realised that the cost cannot justify the risks, including prolonged negotiations and uncertain business prospects," said Tatsunori Kawai, chief strategist at Mitsubishi UFJ eSmart Securities.
Its shares jumped 8% on Thursday after withdrawing the bid.
"To continue further... would ultimately be a lost opportunity for its own growth," said Takahiro Kazahaya, an analyst at UBS.
Analysts are also questioning how Seven & i, famed for its ready meals, will drive further growth.
On Thursday, Natsuko Douglas, an analyst at Macquarie Capital, downgraded Seven & i to neutral from outperform, citing unclear benefits from the planned listing of the North America business.
"Full recovery is a long time away," she wrote in a note.
The planned listing is "something they probably don't want to do but were prepared to do to get rid of Couche-Tard," said Tom Leske, director at Churchill Capital.
Industry experts point to Seven & i's strengths, honed over decades in Japan's bruising retail market, which has proved tough for many foreign entrants.
"Seven globally will be giving competitors a hard time once it has its ducks in a row," said JapanConsuming's Causton.