Japan’s Seven & i Holdings is poised to enhance its value by divesting underperforming segments and honing in on its flagship 7-Eleven stores. The effectiveness of this strategy will be crucial as the company navigates a $47 billion takeover proposal from Canadian firm Alimentation Couche-Tard Inc.
Industry analysts suggest that the retailer’s success hinges on its ability to introduce a new store format in Japan while simultaneously boosting profit margins in international markets.
To implement this strategy, Seven & i plans to separate its supermarket division and approximately 30 other “non-core” businesses into a new holding entity called York Holdings. The parent company will be rebranded as 7-Eleven Corp, reflecting its renewed focus. The company intends to attract strategic investors for York, with the goal of eventually taking it public.
This reorganization signals Seven & i’s commitment to overcoming the conglomerate discount that has adversely affected its stock performance for years. The underwhelming results of its supermarket operations have further positioned the Japanese retailer as an attractive target for Couche-Tard’s acquisition bid, which includes the Circle-K brand.
In August, Couche-Tard made a preliminary offer for Seven & i, which reports indicate has since been raised by 22% to approximately $47 billion. Should the acquisition proceed, it would mark the largest overseas buyout of a Japanese company to date.
Facing pressure from Couche-Tard, Seven & i’s decision to restructure was described by seasoned analyst Akihito Nakai as “unavoidable.” “It’s the only viable option left for them,” he noted.
Seven & i has expressed confidence in its ability to unlock shareholder value through this strategic overhaul, setting ambitious near-term goals, including an EBITDA target of 100 billion yen ($670 million) for the York division in the upcoming financial year.
However, the timeline for achieving these goals remains uncertain, leading some shareholders, including Artisan Partners and ValueAct Capital, to urge Seven & i to eliminate what they deem unnecessary excess within the company. With a global workforce of approximately 157,000, the firm’s operations encompass a diverse range of businesses, from clothing retail to supermarkets and restaurants.
The shift in portfolio strategy highlights Seven & i’s pressing need to enhance shareholder value, as noted by Jefferies analyst Shunsuke Kuriyama.
In Japan, 7-Eleven stores have become integral to daily life, known for their wide selection of fresh food items and everyday necessities. The profitability of Japanese stores is notable, boasting an operating margin of 27%, significantly higher than the mere 3.5% margin seen at 7-Eleven locations outside of Japan.
Out of 7-Eleven’s 85,000 global stores, approximately 21,000 are located in Japan, with the majority operating as franchises. However, the convenience store sector in Japan is highly competitive, with major rivals like FamilyMart and Lawson challenging 7-Eleven’s market share.
Recent reports indicate a slight decline in same-store sales over the past six months compared to the previous year, leading to dissatisfaction among some franchise owners regarding the company’s strategic direction amidst growing competitive pressures.
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