Company executives hailed the opening of the oversized 7-Eleven shop near a commuter train station in this northeastern Tokyo suburb last year as heralding a brighter, more profitable future for the world’s largest convenience store chain.
More like a small supermarket in its offerings and size than a traditional 7-Eleven, the concept store features shelves of fresh meat, fish and vegetables, glass-fronted oven cases of bread and bulk snack dispensers. Staff fill cones with soft-serve ice cream and bake pizzas on request.
But last Tuesday evening as the regular workday came to an end and Matsudo residents started preparing for dinner, the shop’s cash registers were idle and the clerks on duty stood around bored, in stark contrast with the busy and even newer discount supermarket across the street.
It was an ominous sign for the leadership of Seven & i, the convenience store chain’s parent company, which is battling to show that it can deliver more value to shareholders than Canada’s Alimentation Couche-Tard. The owner of rival chain Circle K, Couche-Tard has been courting Seven & i for almost a year and recently deepened discussions with the 7-Eleven operator about a 7 trillion yen ($48.8 billion) buyout offer.
Seven & i is battling to show that it can deliver more value to shareholders than Canada’s Alimentation Couche-Tard
Next Tuesday, Seven & i executives will face shareholders for the first time since Couche-Tard’s approach became public last August as the company’s annual shareholder meeting convenes at its headquarters in Tokyo.
Couche-Tard, unlike some of the foreign activist investors who have pushed for strategic change at Seven & i in recent years, has yet to put any issues directly to the Japanese company’s stockholders. But although nothing will be on the formal agenda directly related to its proposals, management is still likely to be put on the spot given the lively question-and-answer sessions seen at the meetings in recent years.
One source of tension could emerge from a call from Artisan Partners, a Milwaukee, Wisconsin-based fund management company with a 1.1% stake in Seven & i, to reject four of the eight incumbent directors who have been renominated, including incoming CEO Stephen Hayes Dacus and executive chair-designate Junro Ito, over the alleged mishandling of Couche-Tard’s approach.
Given that the four nominees each received over 97% of shareholder votes last year, it seems unlikely any of them will lose their seats, especially as Institutional Shareholder Services and Glass Lewis have both advised their fund management clients to support management’s agenda this year.
But the approval rate will be a key test of sentiment regarding how Seven & i management is dealing with the biggest-ever foreign buyout bid for a Japanese company. Two years ago, a proxy fight launched by activist fund ValueAct Capital saw support rates for targeted Seven & i directors fall by up to 33 percentage points.
The response to Couche-Tard’s offer from Seven & i’s leadership and the Ito family, which founded the retail group, has made waves in Japan, where historically management felt empowered to simply ignore unsolicited buyout offers without consulting or even notifying shareholders. Indeed, the current bid has brought to light previously undisclosed preliminary approaches by Couche-Tard as recently as 2020, before government and stock exchange reforms made clear that Japanese boards must account for how they field takeover offers.
The market still seems hesitant about Seven & i’s strategic plans and the outlook for Couche-Tard’s bid. After closing at an all-time high of 2,633 yen on Dec. 5, Seven & i shares slid 30% over the subsequent four months. Since early April, they have regained some ground even after the company reported a 23% drop in annual net profits but remain well below 2,700 yen, the approximate level of Couche-Tard’s latest offer.
Some market observers tie the rebound to improving confidence in Seven & i’s strategy as well as its increased willingness to engage with Couche-Tard.
In March, seven months after first disclosing the approach from the Circle K operator, Seven & i finally came out with its own comprehensive strategic plan to improve returns to shareholders by buying back shares, raising dividend payouts, selling off stakes in subsidiaries and overhauling its leadership ranks.
The buyback plan has made the biggest impression, as management pledged to repurchase 2 trillion yen worth of shares, equivalent to 35% of Seven & i’s outstanding stock at current prices, within six years. The drive is to kick off with 600 billion yen of repurchases over the current fiscal year, which started in March.
“The buyback is BIG,” wrote Travis Lundy of Quiddity Advisors in a research note on the SmartKarma platform, recommending that investors “Stay in. Get bigger.”
Yet some shareholders may prefer an upfront payment from Couche-Tard for their stock over management’s multiyear payout plan.
“The acquisition proposal from Couche-Tard should create more value because investors can take profits immediately and move on to other investment opportunities,” said Natsuko Douglas, a research analyst with Macquarie Capital in Tokyo. “Seven & i can increase corporate value, but it takes time.”
Unsurprisingly, Couche-Tard takes the same position. In a statement after the unveiling of Seven & i’s strategic plan, the Circle K owner said the measures “all … come with material uncertainty with respect to delivering value to shareholders.”
Management’s huge buyback pledge follows years of campaigns by American activist investment funds including Third Point Management, ValueAct and Artisan Partners to push the company to boost shareholder returns through measures such as selling off noncore business units, which range from the Japanese arms of Tower Records and the Denny’s restaurant chain to a shiitake mushroom producer.
Until recently, Seven & i had only taken measured steps in this direction. In the year ended in February, it returned 160.7 billion yen to shareholders through dividend payments and buybacks, up from 89.7 billion yen two years before. The company last year also introduced a program to award each shareholder with 2,000 yen to 3,500 yen in store gift vouchers.
Seven & i plans to retain minority ownership in Seven Bank, which operates an in-store ATM network.
Its big share buyback would be financed by the sale of stakes in Seven Bank and the group’s superstore and supermarket businesses as well as by the proceeds of an initial public offering of shares in 7-Eleven Inc., which operates the group’s North American convenience stores and generated more than 70% of its overall operating revenues last year.
Seven & i plans to retain minority ownership in Seven Bank, which operates an in-store ATM network, as well as the superstore and supermarket unit, in contrast to its former department store unit, which was completely sold off in 2023 for a mere 85 million yen in net proceeds.
By contrast, the sale of control of Seven & i’s superstores and supermarkets to Bain Capital is expected to bring in hundreds of billions of yen by September. Seven & i has yet to give figures for anticipated proceeds from its Seven Bank and 7-Eleven Inc. stake sales.
However, some question the rationale for selling down 7-Eleven Inc., also referred to as SEI.
Macquarie’s Douglas said that reduced ownership would slow income growth at Seven & i, since it would have to share SEI profits with the unit’s new U.S. shareholders. “Benefits from the SEI IPO are unclear,” she said.
Lundy added that the market price of SEI shares will be depressed because “U.S. shareholders will know that it is not ever going to be an available takeover candidate as long as Seven & i owns a large stake.”
The most eye-catching element of the management reshuffle is the elevation of Dacus, previously lead independent director, chairman of the special board committee that has been evaluating Couche-Tard’s approach and chair of the board’s strategy committee. Dacus once ran Walmart’s Japan operations and also served in senior roles at Japanese restaurant group Sushiro Global Holdings and Uniqlo parent Fast Retailing.
Suggesting Dacus could have been involved with Walmart’s sale of a controlling stake in its Japanese arm to U.S. private equity group KKR, James Halse, founder of Japan-focused investment fund Senjin Capital, said in a LinkedIn post that the Seven & i board “may have decided it’s time to put a dealmaker in charge.”
Aside from the elevation of Junro Ito to executive chair, the reshuffle also includes the nomination of four new independent directors, among them, Takashi Sawada, former president of FamilyMart, 7-Eleven’s biggest Japanese rival, and the appointment of a new president at Seven-Eleven Japan.
Takahiro Kazahaya, a senior analyst at UBS Securities in Tokyo, applauds the new lineup as able “to bring about change in the company.” He called the appointment of Ito “a wise move” that will enable him to play a unifying role amid the accession of Dacus, who never previously worked for Seven & i. Kazahaya added that Sawada could bring a fresh perspective to decision-making at Seven & i.
The new appointments follow the as-yet-unexplained resignations of three incumbent external directors in March, which Artisan Partners called “a sign of dysfunction.” The fund manager said then that Seven & i is one of only two listed companies in the world it knew of “in recent years where decision making at the board of directors has resulted in the resignation of multiple directors.” (Seven & i has said only that the resignations were “at the request of the person concerned.”)
Artisan’s opposition to the renomination of Dacus, Ito, Meyumi Yamada and Yoshiyuki Izawa relates to their respective roles with the special board committee dealing with Couche-Tard’s bid, the Ito family’s abortive takeover bid for Seven & i and the board nominating committee that agreed to elevate Dacus.
Alleging the presence of potential conflicts of interest and describing the company’s performance as “poor,” Artisan said, “The Board of Directors has fallen short of acceptable global corporate governance practice.”
Although Glass Lewis has backed all of Seven & i’s board nominations, it told clients in its recommendation report last month that “Artisan has raised legitimate concerns regarding corporate governance standards at the Company.”
While Artisan and others have accused Seven & i of dragging its feet on engaging with Couche-Tard, the Japanese company has continued to highlight its doubts about whether U.S. competition regulators would approve combining 7-Eleven and Circle K under the same corporate umbrella.
The U.S. is one of nine global markets in which the two big chains compete head-to-head, but appears to be the only market, aside from Hong Kong and Macao, where they are the two largest players.
While Couche-Tard insists it could put together a deal with Seven & i to sell off enough U.S. stores to make the takeover palatable to regulators, the Japanese company remains wary. It has highlighted how a U.S. judge last year blocked supermarket operator Kroger’s $24.6 billion buyout of smaller rival Albertsons, leaving the two companies to sue each other over responsibility for the deal’s collapse after a two-year quest for approval. In a status report to shareholders earlier this month regarding Couche-Tard discussions, Seven & i said its legal adviser had met on March 27 with U.S. competition regulators “who expressed concern around the transaction.”
Some market observers suspect the strategic plan Seven & i unveiled in March was designed partly to derail Couche-Tard’s parallel bid.
Some market observers suspect the strategic plan Seven & i unveiled in March was designed partly to derail Couche-Tard’s parallel bid, a suggestion the Japanese company calls “categorically false.”
Arun George of Global Equity Research is among the doubters. In a comment on SmartKarma on Monday, the analyst wrote, “While the Board claims it is pursuing a dual-track process to create value, the reality is that the process is designed to hinder Couche-Tard’s offer to facilitate the restructuring plan.”
Still, some investors are convinced Seven & i is a good bet, whether under its own leadership or in combination with Couche-Tard.
As of March 31, the 7-Eleven operator represented 6.7% of the portfolio of the Hennessy Japan Fund, run from Tokyo by Sparx Asset Management’s Masakazu Takeda and Angus Lee. The holding, the fund’s third-largest, equates to a stake of about 0.8% in Seven & i.
In an article published on Hennessy’s website in March, the two men highlighted how management has been addressing performance issues and the growth potential of the U.S. and new international markets for 7-Eleven, noting the chain has more than twice as many locations worldwide as McDonald’s or Starbucks despite being present in far fewer countries.
“Seven & i’s long record of accomplishment as a pioneer in this field (of convenience stores) also gives us a sense of ‘safe and sound business,'” they said. “With its immense potential for overseas expansion including the U.S., along with its global brand recognition as the parent company of 7-Eleven, Seven & i looks poised to become a global retail giant.”
