RPT-BREAKINGVIEWS-Giant LBO brings barbarians to Seven & i’s rescue

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

By Una Galani and Anshuman Daga

MUMBAI/SINGAPORE, Nov 13 (Reuters Breakingviews) - Japan’s buyout club is coming to the defence of 7-Eleven. The founding family of Seven & i 3382.T has made a proposal to take the owner of the convenience store chain private. A leveraged buyout worth 9 trillion yen ($58 billion), as reported by Bloomberg, would stretch the country’s financing markets. But it gives the board an alternative suitor in the takeover battle.

The Ito family’s proposal appears to match the latest indicative offer from Canada’s Alimentation Couche-Tard ATD.TO, owner of the rival Circle K stores, after factoring in net debt. Though Seven & i shares jumped 11% after the company confirmed it is weighing both proposals alongside its own value creation plans, the stock remains 16% below the implied per-share value of the two offers.

One hurdle to the latest offer is its sheer size. Only three buyouts in Asia have successfully breached the $10 billion mark, per Dealogic: two deals involving industrial giant Toshiba, and one the take-private of Singapore’s Global Logistic Properties. A leveraged takeover of Seven & i would be bigger than all those combined.

Financing a buyout with 3 trillion yen of equity and 6 trillion yen of debt, per Bloomberg, would be punchy. The Ito family’s existing 8% stake in Seven & i accounts for just a third of the required equity. Lenders, meanwhile, would need to be comfortable with debt equivalent to about 6 times the EBITDA that analysts expect the company to make in the year to February 2025, according to LSEG.

That is in line with the leverage on last year’s buyout of Toshiba. Yet while debt is cheap and plentiful in Japan, its top megabanks – Sumitomo Mitsui Financial, Mitsubishi UFJ Financial, and Mizuho Financial – would face the kind of concentration risk flagged by Japanese officials if they put up all the borrowings. Regional banks and insurers could step up, though non-bank lending is less common in the country.

More importantly, Seven & i would require a radical overhaul to deliver the world-beating returns that previous Japanese buyouts have achieved.

Assume the new owners boost the company’s EBITDA by 5% every year for five years while paying less than 4% interest and use all its cash flow – after capital spending and 30% tax – to repay borrowings. If they could then sell Seven & i for the same 9 times EBITDA multiple at which they bought it, they would retrieve 2.3 times their invested capital, equivalent to an acceptable 18% internal rate of return. Offloading assets such as Seven & i’s superstores and Seven Bank to other private equity buyers could speed up the deleveraging.

That may look attractive, but the returns depend on consistent growth, and Seven & i’s management team led by Ryuichi Isaka has underperformed for years. Even so, if the Ito family can put together a credible proposal, Seven & i’s board will have some domestic barbarians to help it fend off the Canadian raiders.

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CONTEXT NEWS

Japan’s Seven & i confirmed on Nov. 13 it has received a non-binding proposal from its founding Ito family to buy out the company. The offer is worth about 9 trillion yen ($58 billion) including debt, Bloomberg reported on the same day, citing sources.

The founding family, trading house Itochu and existing investors would contribute 3 trillion yen in cash and equity, the sources said. Japan’s largest banks – Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial Group, and Mizuho Financial Group – would put up 6 trillion yen in financing, they said.

The company said it is weighing up the proposal alongside a non-binding takeover approach from Canada’s Alimentation Couche-Tard which values the company’s equity at $47 billion, as well as its own plan to boost shareholder value.

Seven & i shares rose 12% to 2,490 yen on Nov. 13. Couche-Tard’s $18.19 per share offer is worth 2,819 yen at current exchange rates.

(Editing by Peter Thal Larsen and Oliver Taslic)

((For previous columns by the authors, Reuters customers can click on GALANI/ and DAGA/ una.galani@thomsonreuters.comanshuman.daga@thomsonreuters.com))