Collapse of US$46b buyout ramps up pressure on Seven & i

Malaysian Reserve

4 days ago

CANADA'S Alimentation Couche-Tard Inc. dropped its ¥6.77 trillion ($45.8 billion) proposal to buy Seven & i Holdings Co., putting pressure on the operator of 7-Eleven convenience stores to show shareholders it can stage a turnaround on its own.
The yearlong pursuit of what would have been the biggest foreign takeover of a Japanese company ended in acrimony, with Couche-Tard saying Seven & i's founding Ito family had never been open to talks and blaming the board for a 'calculated campaign of obfuscation and delay.'
In response, Seven & i said it was disappointed by Couche-Tard's decision to walk away, and disagreed with what it called 'numerous mischaracterizations' in the letter. Shareholders were also disappointed, sending Seven & i's stock down around 9%. That reflects skepticism over the company's plan to instead deliver value through changes that include a deal to sell off less-profitable retail operators, a listing of its US business, a ¥2 trillion share buyback and the recent appointment of Stephen Dacus as chief executive officer.
Couche-Tard's withdrawal marks a critical juncture for Seven & i, which has struggled to improve its North American operations despite its dominance in Japan. The collapse of the deal also comes amid an evolving corporate landscape in Japan, where shareholder activism is surging and traditional protections against foreign takeovers are under greater scrutiny.
Seven & i's new leadership, and other companies grappling with challenges, are facing ever more pressure to deliver as other foreign investors and private equity firms eye similar opportunities in Japan.
'There is no question that Couche-Tard's negotiations until now have actually woken up executives,' Jesper Koll, expert director at Monex Group Inc., said on Bloomberg Television, adding that management will have to show that they can deliver globally. 'They have their work cut out for them.'
Couche-Tard also disclosed it had proposed alternate arrangements for a deal, including buying Seven & i's international unit and taking a minority stake in the Japanese business. Seven & i countered with a proposal for Couche-Tard to acquire just the overseas business in exchange for stock. Neither side budged.
The proposed price of ¥2,600 represented a premium of 48% to Seven & i's shares prior to the approach becoming public in August 2024, and 18% more than Wednesday's closing price. Inflation and weak demand have weighed on Seven & i's US business, while conditions have been gradually improving in Japan.
Before the proposal became public, an attempt to acquire such a well-known Japanese business at this scale would have been seen as audacious and unlikely, given the historical tendency of the government and corporate boards to prioritize stability over shareholder value. That view may remain in place for a while, despite changes to corporate guidelines aimed at injecting more vigor into corporate Japan through improved governance and protections for investors.
'The moat of Japanese protectionism proved too much for Couche-Tard to cross,' Andrew Jackson, head of Japan equity strategy at Ortus Advisors, wrote in a note. 'It was always highly unlikely that this was going to be successful given Seven & i's positioning as one of Japan's most successful global companies and the fast closing of the ranks.'
While the deal has seen its share of dramatic twists and turns — including a ¥9 trillion counter-proposal led by Seven & i's founding family that collapsed in February for lack of funding — Couche-Tard now considers the prospect truly dead, people familiar with the matter said.
Shareholders already frustrated with Seven & i's slow pace of change and low valuation may use Couche-Tard's disclosures to push management to do more to deliver value. Some of them, most notably Artisan Partners Asset Management Inc., had pressed the company to engage more deeply with Couche-Tard. In a letter sent to the company's directors in March, the US investment firm cited concerns around potential conflicts of interest and the board's 'failure to pursue the path that offers the best future for the company and maximizes value.'
The conditions are still in place for big deals to happen, even if it wasn't going to be between Seven & i and Couche-Tard, according to Nicholas Smith, strategist at CLSA Securities Japan Co.
'The announcement was a significant disappointment, but absolutely not unexpected; I see it as specific to 7&i, rather than representing the overall trend in Japan,' Smith said. 'Activist trades and shareholder proposals are on fire. Private equity sees Japan as one of the most attractive markets in the world and is hiring aggressively. M&A, including hostile M&A, is picking up rapidly. Management can't afford to relax one bit.'
Couche-Tard's letter draws a line under what had been an unusually public and sustained buyout campaign.
Alain Bouchard, Couche-Tard's co-founder and chairman, and CEO Alex Miller made a direct appeal in Tokyo in March for their proposal, holding a news conference to take questions and explain their rationale. Bouchard said at the time that it might be possible to 'enhance' the buyout proposal with better access to financial information.
Since then, the two parties signed a non-disclosure agreement to share information, but Couche-Tard said in the letter that the level of engagement wasn't enough. Most of the financial data shared by Seven & i was minimal or already publicly available, and meetings with management were superficial or tightly scripted, Couche-Tard said. 'None of our critical questions were answered,' the company said.
In one meeting in Dallas, Couche-Tard said a Seven & i executive who attempted to 'thoughtfully address' a question related to international licensees was interrupted and rebuked by Dacus, who pointed to his head as if to remind his colleague to 'think.'
Seven & i has cited concerns over potential pushback from US antitrust regulators over any deal to combine with Couche-Tard. In order to address this risk, the two sides agreed earlier this year to seek potential buyers for about 2,000 North American convenience stores.
Although several parties expressed interest in acquiring the stores, Seven & i didn't share required information with potential buyers, Couche-Tard said. There was also a $1.2 billion termination fee that Couche-Tard said it was ready to pay if it walked away from a deal, which would increase to $1.4 billion if it weren't willing to divest more stores mandated by the Federal Trade Commission.
For its part, Seven & i said the board's special committee evaluating the proposal 'engaged in good faith and constructively with ACT to explore the possibility of reaching a deal that could be consummated and that would benefit our shareholders.'
Seven & i is due to give an update on its turnaround strategy in August.
There were already signs that Couche-Tard was willing to walk away, including comments by Miller last month that it would bring clarity on any deal 'sooner, rather than later.' In the end, Couche-Tard didn't have enough access to information to deliver an offer that Seven & i's board couldn't refuse.
'Seven & i did what any US company would do,' said Jamie Halse, CEO at Senjin Capital. 'It was up to Couche-Tard to put in a knockout offer. The issue is likely a catch-22 of needing financing to make the offer, but needing management support to get financing.' –BLOOMBERG