Seven & i Shares Surge on Couche-Tard's Takeover Bid, Highlighting Value Potential

Seven & i Holdings, the Japanese retail conglomerate, has seen its shares surge by nearly a quarter following an unsolicited takeover bid from Canadian convenience store operator Alimentation Couche-Tard. This significant stock price movement, despite the absence of a disclosed offer price, underscores a prevailing lack of confidence in CEO Ryuichi Isaka's ability to maximize the company's value.

Seven & i's diverse portfolio encompasses convenience stores, supermarkets, restaurants, financial services, and even a Shiitake mushroom producer. However, its crown jewel remains the globally recognized 7-Eleven convenience store chain. While the company's Japanese 7-Eleven outlets are highly profitable, the real opportunity lies in improving its international operations, which account for three-quarters of the company's revenue.

The performance disparity between domestic and international operations is stark. In the three months ending May 2024, Seven & i's overseas convenience stores generated a 4% EBITDA margin, compared to an impressive 38% in Japan. This gap is partly attributed to the low-margin gasoline sales at many North American outlets, where the company operates approximately 13,000 stores following its acquisition of Speedway in 2021.

"The company's overseas convenience stores generated a 4% EBITDA margin in the three months ended May 2024, compared to 38% in Japan."

A new owner could potentially focus on narrowing this profitability gap and divesting non-core businesses. While 7-Eleven in Japan benefits from synergies with the company's superstore operations, these advantages may be less significant in other markets with different consumer preferences.

Valuation estimates suggest significant untapped potential. Assuming the overseas convenience store business is valued at 11 times expected EBITDA (the average of comparable peers), it could be worth $46 billion based on forecasts for February 2025. The Japanese business, with its higher profitability but lower growth, might command a multiple of 8 times EBITDA, equating to $19 billion.

These two units alone could be valued at more than 60% above Seven & i's pre-bid enterprise value and 40% higher than its post-bid implied worth. In a full break-up scenario, the company's equity might be worth as much as 3500 yen per share, double its undisturbed price.

While Isaka could theoretically deliver some of this value to shareholders, his track record raises doubts. Since taking the helm eight years ago, Seven & i shares have underperformed Japan's Topix Index by approximately 60 percentage points. This underperformance has persisted even after independent directors gained a board majority in 2022.

The takeover bid from Alimentation Couche-Tard, a company with twice the profit margins of Seven & i's overall business, presents a compelling alternative for unlocking the conglomerate's full potential. As the situation unfolds, shareholders and market observers will be keenly watching to see how Seven & i's management responds to this opportunity for value creation.