Alimentation Couche-Tard Inc. ATD-T +0.32%increase has abandoned its roughly US$46-billion effort to take over 7-Eleven parent Seven & i Holdings Co. SVNDY +0.95%increase, blasting its Japanese rival for failing to engage in meaningful talks toward a potential deal.
Laval, Que.-based Couche-Tard’s move puts an end to its nearly year-long effort to pursue Seven & i, bringing finality to a situation that has dragged down the Canadian company’s stock price. The Japanese company had been frosty to the proposal from the start, raising further questions about whether Japanese corporations remain as closed to mergers and acquisitions deal-making as they have been historically.
“There has been no sincere or constructive engagement from 7&i that would facilitate the advancement of any proposal, contrary to comments made by 7&i representatives” as recently as this month, Couche-Tard chair Alain Bouchard and chief executive Alex Miller said in a note to the Japanese company’s board released late Wednesday.
“Rather, you have engaged in a calculated campaign of obfuscation and delay, to the great detriment of 7&i and its shareholders. We believe this approach reinforces our concerns about your approach to governance.”
The pulled bid is a big blow for Mr. Bouchard, who has twice previously eyed a purchase of his largest competitor and harboured ambitions to create one of the world’s biggest retailers. But it will be a relief for Couche-Tard shareholders, with a probable jump in its shares on Thursday.
“Investors have symptoms of deal fatigue,” Stifel analyst Martin Landry had said before Wednesday’s news.
Couche-Tard’s all-cash offer was worth 2,600 yen per share, a 47.6 per cent premium to the date its interest became public. Seven & i shareholders will now be left hoping management can deliver something of equal or greater value. As part of their standalone strategy, Seven is selling its underperforming supermarkets and plans to list a portion of its U.S. retail operation to fund a massive stock buyback.
Couche-Tard, which controls the retail banner Circle K, struck a nondisclosure agreement with Seven & i in April, a crucial step. But in a sign things were not moving along as expected, Mr. Miller was cagey when asked last month about the likelihood of a deal and whether his Japanese counterparts were truly responsive.
In Wednesday’s letter, the Couche-Tard executives pulled back the curtain on what was happening behind the scenes.
They said they repeatedly sought to speak to Seven & i’s founding Ito family, a major shareholder in the company, but that they have not been open to any conversation. They described one management meeting with Seven & i in Japan as “tightly scripted” and said their Japanese counterparts were not willing to answer basic queries about industry dynamics. They also said that after 10 weeks of diligence, just 14 total files relating to Seven & i’s U.S. business were provided, while “none of our critical questions” were answered.
“As we have expressed many times, we do believe that fully combining our two companies is the most straightforward and effective way to maximize value to all stakeholders,” the Couche-Tard executives said in the letter.
“We believe this combination has the ability to enhance that path. However, we are not able to effectively pursue this combination without deeper and genuine further engagement from 7&i leadership and the special committee.”
Seven & i confirmed that Alimentation Couche-Tard “unilaterally decided to end discussions” and withdraw its proposal. It denied it acted improperly.
“While we are disappointed by ACT’s decision, and disagree with their numerous mischaracterizations, we are not surprised,” the Japanese retailer said in a statement posted on its web, adding that there have been significant changes in the global economy, exchange rates and financing markets since Couche-Tard made its first proposal.
Seven & I’s special committee “consistently engaged in good faith and constructively with ACT to explore the possibility of reaching a deal,” the Japanese company said. “At the same time, we were always honest about the extraordinary antitrust hurdles a potential transaction would face.”
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It would have been a monster merger, combining the two biggest convenience-store players in the United States at a time the industry is facing mounting pressure from other retail rivals and consumers are closely watching their spending. The sector remains highly fragmented in that country, with the top 10 chains making up only 19 per cent of the total number of stores.
Couche-Tard leaders revealed in the letter that they proposed alternatives to a takeover of Seven & i in its entirety, including buying the company’s international business outside of Japan or taking a 40-per-cent minority stake in the Japanese business. That would have been a way for the Canadian company to learn more about the Asia market, one of its priorities.
They said Seven & i proposed another option, offering its international business to Couche-Tard in return for equity ownership in the Canadian company’s shares. That offer was rejected by Couche-Tard as undermining the “operational prospects of the combined business.”
Japan has long been seen as resistant to foreign takeovers. 7-Eleven’s status as a beloved institution and part of daily life in Japan made Couche-Tard’s bid to win over the company’s stakeholders all the more challenging.
Japan’s government in 2023 issued new guidelines to the corporate sector in an effort to loosen cultural barriers to foreign investment. But Couche-Tard’s move to throw in the towel on its 7-Eleven vision after extensive overtures suggests the government’s message did little to open doors to foreign interests.
The sheer size of the potential takeover had scared some Couche-Tard investors, who have expressed concerns about equity dilution if a big sale of shares is needed to fund the deal. The shares are down 20 per cent from their 52-week high.
At the moment, the key issue for Couche-Tard is that the company is “not delivering growth that investors have become accustomed to, it is not repurchasing shares, and there is an equity issuance overhang,” National Bank of Canada analyst Vishal Shreedhar said in a June 4 research note.
“We anticipate these issues to resolve over the near term.”
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