Seven & i shares end lower on regulatory concerns over Couche-Tard bid

By Ananya Mariam Rajesh and Juveria Tabassum

TOKYO (Reuters) -Shares in Japan's Seven & i, the owner of 7-Eleven, closed nearly 11% lower on Tuesday as investors weighed up regulatory hurdles to a takeover bid from Canada's Alimentation Couche-Tard to create a convenience store giant with almost a fifth of the U.S. market.

While the value of the preliminary proposal by Circle-K owner Couche-Tard 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).

Couche-Tard's shares were marginally up in early trading on the Toronto Stock Exchange. The stock fell a little over 2% on Monday, valuing the company at $58 billion.

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's proposed $25 billion merger with smaller rival Albertsons, 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.

In 2021, Couche-Tard abandoned its $20 billion bid for European retailer Carrefour SA after the takeover plan ran into stiff opposition from the French government.

"We're unsure the (Japanese) government would part with a national food retail champion (France did not). In the U.S., look no further than Kroger and Albertsons. Fuel is politically sensitive, and overlap looks relatively high," Wells Fargo's Anthony Bonadio said.

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' reasoning.

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

"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."

Several analysts also said divestitures would be required to complete the deal.

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.

Ratings agency S&P said Seven & i's creditworthiness would come under pressure following a takeover offer, whether or not the deal goes ahead.

"Even if Seven & i does not accept the proposal, it will likely face renewed calls to invest in growth, improve capital efficiency, and return profits to shareholders," S&P said.

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.

($1 = 146.2800 yen)

(Reporting by Mariko Katsumura and Kiyoshi Takenaka in Tokyo, Ananya Mariam Rajesh and Juveria Tabassum in Bengaluru, Siddharth Cavale and Abigail Summerville in New York, Kane Wu in Hong Kong; Writing by Miyoung Kim; Editing by David Dolan, Stephen Coates, Edwina Gibbs and Shreya Biswas)