(Bloomberg) -- Now that Alimentation Couche-Tard Inc. has signaled its willingness to raise the price for its takeover proposal for Seven & i Holdings Co., the pressure is on the Japanese retailer to show that it can command a higher number, whether in negotiations or through its own efforts.
Although the 7-Eleven operator asserted last week that Couche-Tard’s initially indicated price of $14.86 a share didn’t fully reflect Seven & i’s worth, that still represents a premium of roughly 25% from the company’s value from just before Aug. 19, when the Canadian retailer’s approach was disclosed.
For years, Seven & i has contended with investors who took stakes in the company and agitated for change without seeing their efforts pay off. ValueAct Capital Management LP has argued in the past that 7-Eleven alone could be worth much more as a standalone company. Yet Seven & i has taken too long to show that it can restructure, according to Ikuo Mitsui, fund manager at Aizawa Securities Co.
“They are at a point where they need to show results,” Mitsui said.
Case in point: Seven & i said in April that it is considering a listing of Ito-Yokado, the company’s original retail operation, and eventually split it off from the more profitable and faster-growing 7-Eleven franchise. Yet the shares fell in the days following the announcement, and are trading at roughly the same level.
The deal four years ago to acquire the Speedway gasoline-station network from Marathon Petroleum Corp. for $21 billion was aimed at accelerated its goal of making convenience stores a global business. There, Seven & i plans to use cost savings to deliver growth of more than 20% in net income for its North American operations through the five years through fiscal 2025, which ends March 2026.
Takahiro Kazahaya, an analyst at UBS AG Tokyo, said that Seven & i hasn’t been able to make a strong enough case for growth in North America, contributing to the lack of market reaction. Operating profit for at 7-Eleven Inc., which comprises the North American conveniences stores and the Speedway franchise, fell around 30% in the first three months of the year, while same-store sales have declined for three straight quarters.
Although the US operation sought to increase customer traffic by keeping prices capped in the face of inflation, it wasn’t able to deliver enough and resulted in lower margins, according to a company spokesperson.
“It’s not an easy thing to improve operations,” Kazahaya said.
In its letter to Couche-Tard on Sept. 6, Seven & i described the Canadian company’s approach as “opportunistically timed and grossly undervalues our standalone path and the additional actionable avenues we see to realize and unlock shareholder value in the near- to medium-term.”
“The Board is confident that it can realize and unlock shareholder value through a number of strategic actions, including but not limited to our US business, that we are actively pursuing,” wrote Stephen Dacus, the chair of the committee of independent board members that reviewed Couche-Tard’s initial approach.
Given enough time, that may happen, but investors are getting impatient.
Seth Fischer, chief investment officer at Oasis Management, which holds shares in Seven & i said earlier this week that the fund was disappointed with the company’s decision to push back. “Couche-Tard has put forward a very serious proposal to the company and I am a little bit disappointed with the company’s reaction,” Fischer said in a Bloomberg Television interview.
And while Valueact has been curiously silent over the past month, Artisan Partners has taken up the baton, saying recently that “Couche-Tard sees exactly what we see — an undervalued, mismanaged, world-class asset.”
Mitsui at Aizawa Securities said that Seven & i should embrace a mindset of being a buyer instead of target, and show it through conviction and action. “Seeking growth using the option of M&A” is also a choice that the company could take, he said.
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