Seven & I risks becoming buyout target again if turnaround fails
"If the stock price drops significantly, there might be a possibility of tender offers or hostile takeovers,' said Takamasa Ikeda, senior portfolio manager at GCI Asset Management, an investor in Japanese stocks.
While Seven & I shares are higher than they were before Couche-Tard's interest became public in August 2024, they fell after the proposal was withdrawn this week and are down by more than a fifth this year. Newly appointed CEO Stephen Dacus is under pressure to convince stakeholders that sweeping reforms will deliver, especially in the U.S. and Japan, where inflation and weak demand are weighing on profits.
Seven & I is taking steps to bolster its shares with a five-year, ¥2 trillion buyback. So far, that hasn't done much, with the stock down about 7.8% since the repurchase was announced March 6. Some of the funding for that was due to come from an initial public offering of the U.S. business, but Couche-Tard's exit has raised doubts over whether that plan will remain intact.
Further investor-friendly efforts will be harder to enact, given that Seven & I has already taken drastic steps to overhaul the business, according to Taku Sugawara, an analyst at Iwai Cosmo Securities. The operator of 7-Eleven stores is on track to sell off its less-profitable retail operations in a deal that will close in September, part of the package of sweeping changes announced since Couche-Tard's approach.
The campaign, which if successful would have been the biggest foreign takeover of a Japanese company, ended in acrimony. In a 1,500-word missive, Couche-Tard said Seven & I's founding Ito family had never been open to talks and blamed the board for a "calculated campaign of obfuscation and delay.' Seven & I responded by saying it was disappointed by Couche-Tard's decision to walk away, and disagreed with what it called "numerous mischaracterizations' in the letter.
The remaining path for Seven & I is to pursue greater growth and profitability in the convenience stores business, which investors have been clamoring for. Two years ago, activist fund ValueAct Capital Management pushed for this strategy and unsuccessfully sought to replace Ryuichi Isaka, the prior CEO.
One issue is Seven & I's underlying performance. While operating profit for the March-May period rose 9.7% year-on-year to ¥65.1 billion, it was the second-lowest quarterly result in the past decade. Domestic same-store sales remained almost flat, lagging behind competitors. The U.S. operations squeezed out profits thanks to cost-cutting measures, but revenue remains weak.
"We are closely watching how far Mr. Dacus can go in supporting and managing improvements in performance,' said Takahiro Kazahaya, a senior analyst at UBS Securities.
The CEO is due to give an update on its turnaround strategy in August, with a focus on how he plans to improve the core convenience stores business.
Seven & I has a long history of enacting reforms under external pressure. In 2016, concerns raised by activist fund Third Point over executive appointments resulted in the exit of former Chairman Toshifumi Suzuki and Isaka's appointment. ValueAct's pressure campaign helped fuel Seven & I's decision to sell its Sogo & Seibu department stores to Fortress Investment Group in 2022 for ¥250 billion. The latest reforms were accelerated by Couche-Tard's approach, according to Kazahaya.
While Couche-Tard may have stepped away, its decision to provide a detailed explanation in a long letter may tempt other potential bidders, activist investors, or even rivals, to join the fray. One investor pointed out that the Canadian operator of Circle K stores could have issued a one-line statement, but chose instead to disclose details of its discussions with Seven & I, including the amount of the termination fee ($1.2 billion) and alternate merger scenarios that were discussed.
Artisan Partners Asset Management was especially vocal during Couche-Tard's campaign, pressing the company to engage more deeply with the Canadian retailer. In a letter sent to the company's directors in March, the U.S. investment firm cited concerns around potential conflicts of interest and the board's "failure to pursue the path that offers the best future for the company and maximizes value.'
Another possibility is the resurrection of a management buyout by Seven & I's founding Ito family. A ¥9 trillion proposal to take the retailer private imploded in March after the buyout group, which included Itochu, failed to secure financing. The lackluster share price also makes Seven & I a prime candidate to be taken private by insiders.
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