Barbarians at the Convenience Store: Dawn of Hostile Takeovers in Japan

"Iconic" is a much-overused word but it perfectly fits Japanese convenience store operator Seven-Eleven whose green, red and orange striped logo can be seen in most corners of Japan. Altogether it has 82,500 outlets including overseas stores. That makes it the crown jewel of the Seven & i Holdings Co Ltd and Japan's second-largest retailer behind Fast Retailing (parent of UNIQLO). 

Convenience stores came to Japan in the 1970s under license from the mid-century American pioneers of the format. Over time, they have evolved their own distinct identity, becoming an important part of the social infrastructure. You can pay your taxes at a Japanese convenience store and buy your Taylor Swift concert tickets from an in-store electronic ticketing machine. You can get your Amazon parcels delivered there and live exclusively off the food, as does the protagonist of the novel Convenience Store Woman.

Leverage in Market Capitalization

So it was a sensational development when upstart Canadian convenience store operator Alimentation Couch-Tard signaled in August that it wished to make a hostile bid for Seven & i. In the event the takeover succeeds, it would be by far the largest hostile deal in Japan's modern history. If the predator being foreign was not shocking enough, there is a remarkable imbalance in business scale too. Couch-Tard is only a third the size of Seven & i in revenue and number of stores. 

However – and it is a big 'however' – Couch-Tard has the larger stock market capitalization. It is the reward for its stellar growth record, much of it driven by successful acquisitions. In contrast, Seven & i has been a poor performer in the stock market, though it has also made some acquisitions. Ironically, it outbid Couch-Tard to buy the remaining American-owned Seven-Eleven stores in the United States.

The numbers speak for themselves. In common currency, Seven & i's market capitalization was twelve times larger than Couch-Tard's in 2006. Not having grown since then, it is now significantly the smaller of the two. 

Needless to say, a hostile bid for a major Japanese company could never have taken place before the reforms to corporate governance and the new protocol for takeovers proposed by the Ministry of Economy, Trade and Industry early in 2023. This is probably not the kind of deal the Japanese authorities had in mind. However, blocking it outright would mean nullifying the new dispensation, losing credibility and potentially damaging sentiment among domestic investors.

A 'Strategically Important Company'

Nonetheless, Couch-Tard's bid may not succeed. Investors may consider the offered price too low. If so, the company could find it difficult to gather additional cash. 

More complex issues may get in the way. When Couch-Tard declared its interest, Seven & i immediately requested designation as a strategically important company. That was granted by the government, even though most companies on the list are involved with nuclear power and armaments. 

While "strategic importance" alone is unlikely to be a deal-breaker, regulators may demand so many stipulations that the would-be acquirer simply gives up.

The 'White Night' Scenario

Another possibility could be the appearance of a "white knight." That means a friendly bidder that would leave management in place and make very few changes. In this scenario, the knight would probably need to be a huge Japanese enterprise in a totally different sector. 

Interestingly, the two domestic rivals to the Seven-Eleven convenience stores are no longer listed on the Tokyo Stock Exchange. FamilyMart, Japan's second-largest convenience chain, was bought by trading house Itochu in 2020. 

Lawson, the third largest, became a subsidiary of trading house Mitsubishi Corporation in 2017. It was delisted from the stock market in 2024 when half the equity was sold to Japanese mobile carrier KDDI. These buyers see top-class convenience stores as important hubs for developing new business. 

Good at What It Does but Slow-Moving

Seven & i is not a particularly badly run company. Operationally, the convenience store business works like clockwork, with its intricate supply chains and multiple deliveries per outlet per day. 

Yes, the management has balked at spinning off the underperforming Ito-Yokado superstore, and the return on assets of around 3% is nothing to write home about, given the example of Fast Retailing's 9%. But there are many hundreds of Japanese stock market-listed companies in the same boat: good at what they do, but slow-moving and unready for the implications of a market for corporate control.

Will Couch-Tard Be the First?

If the Couch-Tard bid succeeds, others will use the same playbook. If it doesn't, new playbooks will be tried, as others attempt to be the first to succeed. 

There is no reason why the acquirers should all be foreigners. After all, the first example of METI's new guideline being used in a takeover battle involved two Japanese companies. Last July, electric motor manufacturer Nidec launched an unsolicited bid for machine tool maker Takisawa and won the day.

The idea that Japan is philosophically allergic to hostile takeovers is dubious. For most of the postwar era, the Japanese stock market was dominated by cross-holdings centered on the main banking groups. It was a system that protected management from the outside. 

But in the decades before the war and the early 1950s, there was a freewheeling stock market culture in Japan. In it, colorful figures like Keita Goto, the founder of the Tokyu railway, retail and real estate empire, and his great rival Yasujiro Tsutsumi of the Seibu Group, built their businesses through super-aggressive acquisitions.

Today, the crossholdings have almost all been sold. In many cases, the proceeds have been used to buy back the company's own shares, thereby increasing earnings per share and causing a welcome boost to the stock price.

Legacy of the Buccaneers

Traditionally, Japanese companies have viewed a stock market listing as a matter of prestige. It guarantees a higher quality of recruits and more respectful treatment from bankers. However, it would be no surprise if management began to question the balance of advantages. 

Private companies are not bothered by activist investors. They are much less likely to be criticized for environment, social and governance, or ESG infractions. Best of all, they will never be subject to a hostile takeover. 

Private equity firms are already a significant force in Japan. They are likely to become even busier as many solid companies choose to delist on the basis that "If it can happen to Seven & i, it can happen to anyone."

Meanwhile, the way is clear for the twenty-first-century version of the buccaneering tycoons who created Shibuya and Ikebukuro with their train terminals, department stores, and artistic attractions. They were a bit barbaric too but what a legacy they left.

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Author: Peter Tasker, Arcus Research
Find other essays and analyses by Peter Tasker on JAPAN Forward
NOTICE: Arcus Research works in the field of finance and may or may not hold or be short of stocks mentioned.