Canada’s Alimentation Couche-Tard’s, operator of rival Circle K, has reportedly increased its original bid to acquire Japan’s Seven & i Holdings, owner of rival 7-Eleven convenience stores, after a $39 billion offer was rejected back in early September.
The combined entity would bring together more than a hundred thousand shops globally, where in Japan, the popularity of konbini outlets provides a slew of amenities from ready to eat meals to bill payment services.
The unsolicited bid represents the largest offer by a foreign enterprise looking to acquire a Japanese-listed company. Though the initial proposal was declined, the deal presents a window into Tokyo’s persistent effort to enhance shareholder value from its major corporations, according to Eric Ritter, adjunct professor of economics at Lakeland University in Japan, speaking to FinanceAsia.
“Japan inc. has historically struggled to convince investors that past corporate reforms were achieving their intended goals,” Ritter explained.
One of the persistent grievances voiced by shareholders is their propensity of hoarding cash on their balance sheets rather than investing in their businesses or paying out dividends. Despite generating interest income, cash diminishes investor metrics such as return on assets (ROAs) impacting market multiples and resulting in an undesirable opportunity cost during years of low interest rates.
Since the beginning of 2023, Tokyo’s campaign to shift priorities has translated into an upbeat equity performance. Coupled with a weaker yen benefiting tech exporters, the Nikkei 225 has returned almost 50% within that span, even recovering most of the heavy market sell-off from the August rout.
“Corporate reforms and improvements in shareholder returns are what’s driving the market,” noted Björn Jesch, global chief investment officer at DWS, adding that Japan’s reflation narrative is viewed as an alternative to Chinese equities.
Jesch added that Japan’s more favourable macro backdrop is prodding investors to close their previous underweight positions. “We would take advantage of the short-term weakness in selected stocks to build long-term exposure even though we remain tactically neutral,” according to an August DWS research note.
The previous Japanese Rubicon line
Couche-Tard’s bid establishes a precedent for further proposals in Japan. While only a few will transpire to formal acquisitions, the stream of inquiries is expected to continue. Lakeland University’s Ritter suggested that the consideration of a foreign offer crosses an important threshold, which were once ignored by Japanese corporations on the belief that outsiders could not enhance business operations.
Tokyo’s regulators seem to agree, especially surrounding businesses that are perceived to uphold national interests, such as information technology companies or chip manufacturers. Though konbini outlets may not be the pinnacle embodiment of technological innovations, they function as important distribution points for hard-to-reach areas, which have proven critical following natural disasters. In this regard, they are ingrained not only in the fabric of Japanese society, but its livelihood.
Closing any of these on the merits of improving shareholder returns may not bode well with Japanese rural voters who depend on them. That sentiment was echoed by Seven & i Holdings’ rejection letter, stating that even though the bid price exceeded the market capitalisation, it undervalued those community services and other future regulatory hurdles.
Seven & i Holdings’ dismissal coincides as the White House plans to block Nippon Steel’s acquisition of US Steel despite shareholders approving the deal earlier this year. Given the upcoming US election with each candidate vying to win support of union workers in a critical swing state, the risk that Tokyo reciprocates on national security grounds is feasible.
Japan’s merger and acquisition story has not derailed, since “more investors are starting to buy, or at least considering buying, undervalued Japanese stocks which could benefit not just from a foreign purchaser, but even a domestic one as well,” Ritter comments, adding that the August correction has created another opportunity with valuations coming off.
However, investors have heard the corporate reform story before. Compounding these challenges is the political backdrop domestically where new Japanese Prime Minister Shigeru Ishiba is facing political turmoil after failing to win a snap election earlier this week. The result saw the yen fall to a three month low against the US dollar. The country now faces days of political uncertainty as their politicians try and resolve the leadership crisis.
Seven & i Holdings reported its quarterly results in early October, announcing a dividend payment of ¥20 to be distributed in November, while also cutting its operating profit outlook for the 12 months ending February to ¥403 billion ($52 billion) from an earlier target of ¥545 billion. A plan to divest non-core assets was also publicised, showing that Couche-Tard’s bid is cornering Japanese corporations into an uncomfortable position - forcing them to choose shareholders, or the customers that rely on their services -- and the local stores have a very unique position within Japanese society.
The latest plan from Seven & i Holdings is to double sales by to around $200 billion by the fiscal year through February 2031; this is a huge ambition.
With additional reporting from Andrew Tjaardstra.
