Seven & i takeover proposal tests Japan's investment-friendly stance

A proposed takeover of Seven & i Holdings Co. that could result in the sale of one of Japan’s strongest brands marks the first big test of the country’s evolving investor-friendly stance.
 

Canadian retailer Alimentation Couche-Tard Inc.’s proposal to buy the operator of 7-Eleven convenience stores follows the introduction last year of government guidelines on mergers and acquisitions instructing companies to seriously consider takeover offers. After years of activist investors pushing for change and unconsummated attempts from abroad to buy big companies, the deal is being keenly observed at home and abroad.

“It’s an important litmus test for Japan,” said Howard Smith, a portfolio manager at Indus Capital Partners who holds a position in Seven & i. “It will be looked at globally by investors and strategic buyers as to the appeal and ease of doing mergers and acquisitions in Japan.”

The new M&A guideline from the economy ministry isn’t binding, but its impact has already been seen in a handful of domestic deals with multiple competitive bidders. This will be the first major one involving a foreign firm’s proposal.

A potential obstruction for the takeover is that the Japanese government can block the deal or ask for changes in the terms, because of the fact that Seven & i is on a list of companies considered important for national security. That means officials will keep a close eye on foreign investors seeking any deal. 

Seven & i shares have climbed about 14 per cent since Couche-Tard’s proposal became public. A potential deal could be worth more than ¥5.25 trillion ($36 billion), based on the retailer’s current market value, which would be the largest-ever takeover of a Japanese company.

Japan’s greater openness to corporate dealmaking is the latest step in a years-long effort to improve corporate governance that’s coincided with a burst of investor interest in the country, including from Warren Buffett. It’s become the world’s second-biggest activist market in past years, driven by perceptions that shares are undervalued, companies are badly-managed and more recently, that a weakening yen would boost earnings.

Although many activists tend to focus on smaller companies with straightforward requests to raise dividends or boost buybacks, a handful of larger, well-known global firms had also been targeted with more ambitious demands for change — the most high-profile of which has been Seven & i itself.

The retailer, which has more than 21,000 stores in Japan, has been embroiled in a multiyear spat with San Francisco-based ValueAct Capital Management LP, which has publicly demanded the company spin off the 7-Eleven convenience store brand, sell non-core businesses and replace top management — with mixed success. Back in 2015, the company had contended with Dan Loeb’s Third Point LLC.

Couche-Tard’s bid essentially rode the coattails of activist investors this time, some say. 

“ValueAct’s very public campaign effectively instigated the bid because it so clearly framed Seven & i’s shortcomings and undervaluation, and highlighted its potential,” said John Seagrim, a broker at CLSA in London.

Regardless what happens with the takeover proposal, analysts expect the company to make further moves to boost Seven & i’s share price, UBS analysts led by Takahiro Kazahaya wrote in a note on Aug. 21.

Ironically, Seven & i Chief Executive Officer Ryuichi Isaka was appointed in 2016 with the help of a pressure campaign from Third Point, which held a stake in the firm at the time. Isaka got the post after weeks of boardroom drama and the resignation of his predecessor after an unsuccessful plot to oust him from the line of succession. 

Couche-Tard’s proposal for the 7-Eleven operator may also serve as a reminder to to other Japanese companies that they need to improve their business to global standards or risk losing control.

“This is a very big wake-up call because it’s an extremely big company, it’s a household name,” Smith at Indus Capital said. “It’s a reminder that there’s no better defense than a high stock price. That is the best defense you can have against an activist or against a strategic buyer.” 

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