(Bloomberg) -- The yen’s rapid appreciation over the past month presents another hurdle to Alimentation Couche-Tard Inc.’s takeover proposal for Japan’s Seven & i Holdings Co.
A buyout by the Canadian convenience store operator, which would be the biggest-ever foreign acquisition of a Japanese company based on Seven & i’s current market capitalization, already faces questions in terms of potential funding and the target’s efforts to seek government protection.
The yen has surged about 11% since hitting multi-decade lows versus both the dollar and its Canadian counterpart in early July. Currency strategists expect the rally will continue in coming months as Japan’s interest rate gap with other nations narrows, making Seven & i increasingly expensive for the foreign suitor.
The stronger yen could even raise the prospect of Seven & i trying to defend itself by making a reverse takeover proposal for Couche-Tard, according to Koji Hirai, president of merger-and-acquisitions advisory firm Assist.
To be sure, the yen is still 24% weaker against the Canadian dollar than it was four years ago.
Couche-Tard hasn’t provided terms or a price for its proposed buyout of Seven & i, which has a market capitalization of about ¥5.7 trillion yen ($39 billion). Couche-Tard’s value in US currency terms is about $52 billion. That makes the Japanese company a big mouthful, and one that will get larger if the yen continues to advance.
The potential impact of the rising yen balloons further when considering how much higher the price tag may be when looking at multiples for past deals by Couche-Tard.
A representative of Seven & i declined to comment, while Couche-Tard didn’t immediately respond to a request for comment.
Data compiled by Bloomberg indicates that Couche-Tard’s 2017 acquisition of CST Brands LLC came in at 12 times when dividing enterprise value by earnings before interest, taxes, depreciation, and amortization. Applying this multiple to Seven & i and subtracting net debt produces a potential takeover price of about ¥9.8 trillion.
Mio Kato, an analyst with LightStream Research, said the strong yen may be a high hurdle to closing a deal.
Funding the acquisition in yen to avoid the impact of exchange rate fluctuations would be difficult, according to Kazunori Suzuki, a professor at Waseda University’s Graduate School of Business and Finance. While Couche-Tard could seek financing from Japanese banks to raise a huge amount of yen, Seven & i may leverage its relationships with the nation’s lenders to discourage them, he said.
Couche-Tard is scheduled to announce its quarterly results later on Wednesday. Investors will be on alert for any mention of the company’s proposed acquisition of Seven & i.
The yen climbed about 0.2% to 145.20 per dollar at 6:37 p.m. in Tokyo.
--With assistance from Issei Hazama, Koh Yoshida and Mathieu Dion.
(Updates with current and historical levels of the yen from third paragraph.)
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