(Bloomberg) — Seven & i Holdings Co. is embarking on its biggest-ever overhaul, betting that a bold breakup will help fend off an unsolicited takeover proposal from a smaller rival and make up for a sluggish profit outlook.
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“We are going to speed up our transformation,” Chief Executive Officer Ryuichi Isaka said in his first remarks since an buyout approach from Canada’s Alimentation Couche-Tard Inc. became public in August. Seeking to restore profitability and focus more on convenience stores, Isaka laid out a major revamp: “This plan is designed to bring out our strengths and achieve greater growth.”
Seven & i essentially unveiled a plan to split in two: One business would be focused on 7-Eleven, convenience stores and gasoline stations, and the other would be a collection of 31 less profitable retail operations that might bring in strategic partners and eventually be listed separately.
The big question is if the move will be enough to win over any investors warming to Couche-Tard’s approach. Shares in Seven & i dropped as much as 4.6% in early trade Friday.
The potentially problematic backdrop to potential deal negotiations is that Seven & i’s core convenience store business is weakening, and it’s unclear if the retailer, which will also rename itself 7-Eleven Corp. — has a plan to address that.
Operating profit outlook for the 12 months through end-February was cut to ¥403 billion ($2.7 billion) on weaker convenience-store sales, falling short of a prior forecast for ¥545 billion and analysts’ average projection of ¥524 billion. Inflation is hitting spending among mid- and low-income shoppers, especially in the US, the company said.
Isaka said Seven & i will keep a minority stake in the retail business that will be split off and called York Holdings Co. An investor relations day is being planned for Oct. 24 to provide more details on the initiative.
Operating profit for the latest quarter that ended in August fell 20% to ¥128 billion, on net sales of ¥3.3 trillion. One bright spot was that the retailer, which operates more than 85,000 stores across the globe, raised its sales forecast for the full year, to ¥11.9 trillion from ¥11.3 trillion on stonger economic conditions and new retail initiatives.
Whether the disappointing numbers and outlook will make it harder for Seven & i to push back against Couche-Tard’s takeover proposal, even with the radical changes designed to bring more focus to the core convenience-store business, remains to be seen.
“There wasn’t a story strong enough to convince investors that the company can improve deteriorating performance,” said Ikuo Mitsui, fund manager at Aizawa Securities Co., adding that it would have been better if Seven & i had presented a plan to boost sales, rather focusing mainly on profitability.
The fresh initiatives come after the Canadian operator of Circle-K stores sent Seven & i a new potential acquisition price of ¥7 trillion last month, people with knowledge of the matter said this week. That’s 20% more than the prior indicated offer, and a 50% premium from where the shares were trading at in mid-August.
Many investors are currently attracted to the proposed buyout price, and that a stronger growth strategy will be “necessary to attract any new buyers,” Mitsui said.
Asked about the approach, Isaka said that Seven & i would refrain from speaking about any discussions, on the request of Couche-Tard, and listen to shareholders on any proposals that would lead to greater corporate value.
Seven & i’s shares fell less than 1% to close at ¥2,325 on Thursday, well below Couche-Tard’s indicated offer price of $18.19, or ¥2,709, per share. Apart from potential swings in the yen that could change the value of any potential deal, Seven & i has cited regulatory issues as a potential hurdle that hasn’t yet been addressed.
The saga is being seen as a key test of whether corporate Japan, long considered impenetrable for inbound mergers and acquisitions, is ready for change. An acquisition of Seven & i would mark the biggest-ever takeover of a Japanese company.
Since Couche-Tard’s approach became public, Seven & i sought, and received, a designation of being a core business essential to national security, a step that was seen as an attempt to make it harder for a foreign entity to take over the company. Even so, Japan’s finance ministry has played down the idea that the designation would make any buyout difficult.
For years, Seven & i has faced calls from investors to focus more on its convenience-store business. ValueAct Capital Management LP has argued that the Japanese retailer should be worth more than it is now — ¥6 trillion — without a conglomerate discount. Couche-Tard has a market value of $51 billion, about $10 billion more than Seven & i.
Regardless of how talks between Couche-Tard and Seven & i play out, Japan will probably see even more merger activity, thanks to improved governance, market regulators pushing to boost value and clearer guidelines on corporate mergers.
“This is the first of many that are going to come,” said Zuhair Khan, who runs a long-short fund at Union Bancaire Privee that invests in Japanese businesses based on the quality of their corporate governance.
Seven & i originated as a clothing store a century ago and evolved into a general merchandiser, selling everything from groceries and sundries. After bringing 7-Eleven shops and Denny’s restaurants to the country in 1974, the convenience-store concept turned out to be transformational for the company, which later took over the entire chain and embraced it as part of its name.
(Updates with share move in 4th paragraph.)
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