By Jinjoo Lee
The fight is on for Japanese 7-Eleven owner Seven & i: Its founding family, alongside other Japanese investors, have proposed what would be a risky and record-breaking buyout to counter a bid from Canada's Alimentation Couche-Tard. The outcome depends not just on how much money each buyer group can raise, but also how much trust they have from their respective investors.
Late Tuesday, reports emerged that Seven & i's founding family, alongside existing investors and trading house Itochu, are considering a buyout of the company. The deal could be worth around 9 trillion yen, or equivalent to $58 billion, according to Bloomberg. About a third of that would be financed by cash and equity from the investor group, with the other two-thirds ($38.7 billion) coming from loans by Japan's three biggest banks, according to the report. Seven & i confirmed that it had received a take-private proposal, though it didn't comment on the offer price. Seven & i's shares jumped 12% on Wednesday, putting its enterprise value above the $58 billion take-private offer.
If that offer is a serious number, it would represent a rather expensive effort to prevent Seven & i from falling into foreign hands. Canada's Couche-Tard, the second largest convenience store owner in the U.S. behind 7-Eleven, offered its second bid for the company last month.
The Japanese take-private offer tops Couche-Tard's by about 23%. Still, the reported price tag isn't crazy relative to Seven & i's earnings. At $58 billion it would represent about nine times Seven & i's trailing-12-month earnings before interest, taxes, depreciation and amortization. Recall that Seven & i paid an almost 14 times multiple to buy Speedway a few years ago. Couche-Tard itself trades at about a 12 times multiple.
The deal size, though, undoubtedly raises some eyebrows -- particularly the debt component. The largest leveraged buyout financing since 2000 was for Energy Future Holdings and involved $24.5 billion of debt, according to Dealogic. This take-private would involve nearly $39 billion of debt. That is almost six times Seven & i's earnings before interest, taxes, depreciation and amortization.
That could raise questions about whether Japanese banks could pull it off, though these banks do have a lot of firepower. Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho have combined assets that rival the size of the U.S.'s two largest banks -- JPMorgan Chase and Bank of America -- put together, according to data from S&P Global Market Intelligence. Perhaps one helpful offset is that borrowing is cheaper in Japan.
The big question is whether Couche-Tard has what it takes to counter the take-private offer. Even with its last bid, the company would have had to raise equity in addition to debt to maintain a leverage ratio that wouldn't hurt its credit rating, according to Anthony Bonadio, equity analyst at Wells Fargo. Just matching the take-private offer would imply that Couche-Tard has to raise enough equity to fund about 30% of the deal, says Bonadio.
Which side prevails will depend on a couple of things: One is antitrust scrutiny. In the U.S., the road ahead is likely a lot smoother after Donald Trump's victory. He is likely to replace the antitrust agency's head with someone more deal-friendly than Lina Khan. Despite being the two largest convenience-store players in the U.S., Seven & i and Couche-Tard together have just 12% of the local market. On the other hand, if Itochu continues being involved in the buyout consortium, it could face more antitrust scrutiny in Japan. Itochu owns Family Mart, the second-largest chain in Japan. Together, Family Mart and 7-Eleven owned 68% of convenience stores in Japan as of 2022, according to Seven & i's website.
That leads to another consideration, which is how much synergy each buyer can expect to generate. That part is a little fuzzier to assess. Couche-Tard has no synergies to be gained from 7-Eleven Japan, which is where its biggest concentration of stores are. And cost savings might be harder to come by in the U.S. with an experienced and efficient operator like 7-Eleven. Of course, Japan's Family Mart has the opposite problem, with no presence in the U.S.
But another important factor is how much trust each company has from investors. Couche-Tard's investors have fared very well -- with total shareholder returns exceeding 3,000% over the past 20 years. The company is a darling of Canadian equity markets and has the support of Canadian pension funds, notes Tyler Tebbs, chief executive of Tebbs Capital, an event-driven research firm whose clients include some Seven & i investors. That bodes well for Couche-Tard's ability to raise equity to support the deal.
Seven & i's investors, on the other hand, aren't as trusting of the company's management, Tebbs says. The company has a poorer record of returns and hasn't been proactive about delivering value: It only decided to sell a noncore department-store business after pressure from activist investors, for example. That means if Couche-Tard doesn't increase its bid to Seven & i's liking, the management team will probably need to pull through with some kind of deal exceeding Couche-Tard's offer. If neither deal goes through, activist investors are likely to get involved again, according to Tebbs.
Some kind of deal seems inevitable, and at a good price too. Whether Team Canada or Japan Inc. comes out on top, it is shaping up as a win-win for Seven & i investors.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
(END) Dow Jones Newswires
November 14, 2024 06:31 ET (11:31 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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