7-Eleven owner rejects Couche-Tard’s offer, but leaves door open

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When Seven & i Holdings Co. rejected a takeover offer from Alimentation Couche-Tard Inc., the Japanese retailer went to great lengths to make it clear that price was the issue, not the takeover idea itself.

It’s one sign of a broader shift underway in corporate Japan, long considered impenetrable by vested interests protecting the companies. Years of pressure from regulators and investors to ease restrictions are finally beginning to bear fruit, creating an environment where transformative deals are now more possible.

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“It has now become necessary to respond to sincere proposals with sincerity,” says Wataru Tanaka, a professor at the University of Tokyo who participated in a study group that developed the government’s guidelines on takeovers. “It clearly says you can’t turn them away at the door.”

That message was clear in a letter sent by 7&I’s committee of independent outside directors to vet the proposal. Stephen Dacus, a retail industry veteran who chairs the group, said the 7-Eleven operator “is open to genuinely considering any proposal that is in the best interests of 7&I shareholders and other stakeholders.”

The panel said the price tag of 5.55 trillion yen ($38.7 billion) set by Coach Tarde was too low. But the response was not an outright rejection, instead opening a new chapter in talks among retailers after a long period of silence since the proposal was unveiled on Aug. 19. Seven & I also raised concerns about regulatory risks, given the retailers’ overlapping footprint.

Other deals in progress

Regardless of how the talks between Circle K operator CoucheTard and Seven&I go, Japan is likely to see more merger activity, thanks to improved governance, regulators’ efforts to boost value and clearer guidelines on mergers. Aside from Seven&I, which if completed would be Japan’s largest-ever acquisition, a bidding war is currently underway for FujiSoft, a software developer valued at ¥644 billion.

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“It’s a completely different environment,” says Zaheer Khan, who runs a long-short fund at Union Bancaire Privé that invests in Japanese companies based on the quality of corporate governance. “Things that were unimaginable even a few years ago are now very possible.”

The price the Canadian company has set represents a premium of about 21% to the price it had set before the deal was announced. Seven & i shares fell 1.4% on Friday, giving them a valuation close to Coach Tarde’s proposal.

Activist investors have sought to penetrate Japan’s private sector for years, but their success has been mixed. Their attempts have often been rebuffed after public campaigns that have sometimes led to stiff resistance in boardrooms. Softer approaches have tended to produce better results.

Last year, KKR & Co., CVC Capital Partners and Blackstone Inc. abandoned their bid to buy Toshiba Corp. after facing a stubborn management. Concerns about valuation, complexity and the political nature of the deal were all headwinds that ultimately led to a local union victory last September.

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The updated guidelines on corporate takeovers make clear that the government expects companies to evaluate potential deals fairly and transparently. The Ministry of Economy, Trade and Industry said such deals should be evaluated based on whether they can “enhance the value of the company” and improve “inefficient management.”

What is at stake now is the broader effort to revitalize Japan’s economy after three decades of deflation and ultra-loose monetary policy. With the Bank of Japan seeking to raise interest rates and the need for broader structural and labor reforms, there is a greater understanding that progress will not come without disruption, however painful.

Although Seven & I appealed to the government for greater protection, the Foreign Exchange and Foreign Trade Act, which might have provided some protection, was actually designed to encourage foreign investment. The rules were enacted with two main objectives: “to encourage foreign direct investment that is appropriate to sound economic growth,” and “to ensure minimal review of foreign direct investment that may pose a threat to national security.”

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In fact, the legislation is less protective in nature than the system in place in the United States, where President Joe Biden is poised to block Nippon Steel Corp.’s $14.1 billion takeover of United States Steel Corp. The proposed deal is under scrutiny from the Committee on Foreign Investment in the United States, which has been used to thwart mergers in the past on security grounds.

With political pressure to continue to ease the M&A environment, it may be difficult at this point for the Japanese government to step in to protect Seven & i, according to UBP’s Khan.

The company has applied to change its legal classification as “essential” to national security, which requires the government to notify in advance of any purchase of more than 10 percent of its shares.

“Whatever happens with this particular acquisition, it sends a message to the Japanese leadership that size doesn’t matter,” Khan said. “Now, big global rivals increasingly realize that they can bid for almost any Japanese company.”

-With help from Taro Fuse.

Bloomberg.com

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