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The Japanese operator of 7-Eleven is discussing ways to defend itself against a takeover bid by Canada’s Alimentation Couche-Tard, including by applying for the same status as companies in the nuclear and semiconductor industries.
Two people close to Seven & i Holdings said such a tactic, which would involve trying to persuade the government to change the company’s designation from a “non-core” to a more protected “core” rating under Japan’s Foreign Exchange and Foreign Trade Act (Fefta), was among several options under examination.
Seven & i declined to comment.
The internal discussions on the means of thwarting a bid have emerged just 10 days after Seven & i publicly acknowledged it had received a preliminary proposal of a full takeover by Couche-Tard, and had established a special committee of independent board directors to examine the offer.
Since that announcement, shareholders in Seven & i have described the approach by Couche-Tard, which has so far been friendly, as presenting litmus tests of Japan’s political, legal and societal attitudes towards M&A.
“It looked like Seven & i was doing all the right things, deferring to a special committee. But if, behind the scenes, they are already talking about defence tactics, it suggests that whatever the special committee decides, at least one group within this company is not entering this with an attitude of what will be best for shareholders,” said one investor who has held the stock for over three years.
Seven & i has a market capitalisation of more than $38bn. A successful takeover of the company — a repeated target of shareholder activism that has delivered relatively poor value to investors for eight years — would be Japan’s largest by a foreign buyer.
The special committee, whose deliberations are set to end in mid-September, was established in line with the government’s recently revised M&A guidelines. These encourage Japanese companies, that might in the past have ignored bona fide approaches from potential acquirers, to take them seriously and give proper weight to implications for shareholders.
Investors argue that Couche-Tard’s bid, while friendly, is a response to long-term failure by Seven & i managers to address their interests.
Ben Herrick, associate portfolio manager at Artisan Partners’ international value team, which holds a stake in Seven & i, said the management team had, to an extent, brought the situation on itself. “They have kicked opportunities to increase value down the road and do not show a sense of urgency. I think they do not realise we are in this current situation because of that,” he said.
Under its current Fefta status, a takeover of Seven & i would need government approval only after a deal had been agreed. If it were able to convince the government to upgrade to “core”, a would-be foreign buyer would be subject to vetting by the finance ministry.
M&A lawyers in Tokyo who have worked on Fefta-related issues said efforts to apply for “core” status would not be straightforward and would not necessarily succeed. An attempt to convince the government that convenience stores were critical infrastructure in natural disasters, the lawyers said, would need to show that such a role would be threatened in some way by foreign ownership.
Nicholas Smith, Japan strategist at CLSA Securities, noted, however, that Seven & i was a conglomerate with 180 group companies spanning banking, insurance, petrol sales, freight transport and agriculture. This list might provide grounds for greater regulatory scrutiny of a foreign bid.