Seven & i shares reverse course on regulatory concerns over Couche-Tard's bid

TOKYO (Reuters) -Shares in the 7-Eleven owner, Japan's Seven & i, reversed course on Tuesday, as investors weighed up regulatory hurdles to a takeover bid from Canada's Alimentation Couche-Tard (TO:ATD ) to create a convenience store giant with almost a fifth of the U.S. market.

While the value of the preliminary proposal by Couche-Tard, which owns Circle-K, has not been disclosed, it would make the 7-Eleven parent the largest-ever Japanese target of a foreign buyout.

The news of the deal sent Seven's shares surging by almost 23% in Tokyo on Monday, valuing the retailer at around 5.6 trillion yen ($38 billion). The stock closed down 10.6% on Tuesday.

The deal would allow Couche-Tard to boost its global reach and improve economies of scale. Yet it would almost certainly attract regulatory scrutiny in the U.S., analysts said, where grocery chain Kroger (NYSE:KR )'s proposed $25 billion merger with smaller rival Albertsons (NYSE:ACI ), announced in 2022, was halted last month due to an antitrust lawsuit.

"It may face obstacles from the Japanese government as the largest foreign acquisition of a Japanese conglomerate, (and) the Federal Trade Commission in the U.S.," said Michael Ashley Schulman, chief investment officer at Running Point Capital.

If successful, he said, the combined company would be a "formidable force" for negotiating supply contracts and expanding into new markets in Asia and South America.

7-Eleven is the biggest operator in the U.S. convenience retail store space with a 14.5% share of the market in 2023 and Couche-Tard's banners had a 4.6% market share, according to analytics and consulting firm GlobalData. Combining the two would create the industry leader by a considerable margin.

"It seems like it's financially compelling. Seven & i is undervalued and getting the industry leader at a multiple lower than your own, and having synergies and taking out your main competitor is compelling," said a source familiar with the two companies' thinking.

Still, the source said, sealing the deal seemed a bit of a43 stretch.

"I don't really know how Couche-Tard can think this deal will get an FTC approval and if it does how it won't be like a Kroger/Albertsons process that was long and super painful and expensive."

RELUCTANCE

The 7-Eleven operator has been on a drive to bolster its flagship convenience store chain globally, part of a larger restructuring that has seen it sell off some lower-performing assets in the wake of pressure from shareholder ValueAct Capital about its asset allocation.

"Couche-Tard can greatly increase the margin and profitability of the existing Seven & i Speedway and 7-Eleven locations," said Cole Smead, CEO of Smead Capital Management, which owns shares in the Canadian firm, adding "they have a history of buying assets and improving the margin in the overall business."

But others cautioned that Seven & i may be reluctant to engage with Couche-Tard in light of its years-long fight with ValueAct that began in 2021.

The San Francisco-based hedge fund had urged the company to consider spinning off its 7-Eleven chain, which was rejected by the Japanese firm. ValueAct also pushed to replace four Seven & i directors last year but lost the campaign.

ValueAct declined to comment on the proposal.

"I think Seven & i won't engage and then some activist... will agitate and try to force them to take the offer seriously," said the source familiar with the two convenience store owners.

Morningstar analysts said the takeover price should be at least equal to their fair value estimate of 2,300 yen per share to be successful, or a 19% premium to Tuesday's closing price of 1,933 yen.

Seven & i said on Monday it has set up a committee composed only of independent directors to review Couche-Tard's proposal which includes buying all of the company's outstanding shares.

The Canadian company confirmed a "friendly proposal" was sent to Seven & i, adding it was focused on reaching a mutually agreeable transaction.



Couche-Tard is valued at roughly $58 billion.

($1 = 146.2800 yen)

Source: Investing.com