Commentary: A 7-Eleven buyout would stretch Japan’s appetite for M&A

TOKYO: The 7-Eleven convenience store experience is so quintessential to modern Japan that it’s sometimes hard to recall that it’s not Japanese. 
The first in Japan opened 50 years ago in Tokyo’s Toyosu, where the first item sold was a pair of sunglasses. At the time, it was the inaugural franchise store under a model imported from the United States; a few decades later, the Japanese “conbini” experience had become so successful that the Japanese offshoot bought out its US parent. 
But now the business could be returning to North American control, at least if Alimentation Couche-Tard gets its way. The audacious bid by the Canadian operator of Circle K for 7-Eleven’s parent firm Seven & i Holdings, which could cost as much as US$86 billion according to Bloomberg Intelligence, has sent waves through the retail industry – and chills through a country where Seven, as the store is typically known, has become a national institution. 
Just as the retail space has changed beyond recognition since 7-Eleven first arrived, the country’s mergers and acquisitions environment is unrecognisable even from just 15 years ago, when closing ranks to prevent foreign takeovers was a common sight.
Last year, the government launched new guidelines aimed at further shaking up Japan’s takeover market, pressing boards to consider the benefits to shareholders when presented with a takeover offer, and requiring “sincere consideration” for bids that, in years past, might have been dismissed out of hand. 
Nonetheless, accepting a takeover of Seven & i, a deal which would dwarf past foreign takeovers of Japanese firms, feels like a stretch. This is no anonymous maker of parts, but a very close-to-hand and beloved brand that exists in every prefecture in the country and is frequented daily by some 20 million people, or a sixth of the population.
7-Eleven has also been the ultimate pioneer in the convenience store space: It pioneered the sale of onigiri rice balls in the 1970s and built out a vast range of cheap, fresh and surprisingly nourishing food with its just-in-time inventory management. Enabling customers to pay bills or withdraw cash at any time broke the monopoly of banks that closed at 3pm and on weekends.
From the introduction of affordable, fresh coffee to its recent plans to compete with Domino’s Pizza in meal delivery, Seven continues to make its stores more essential. In times of disaster, the conbini is now seen by locals and authorities alike as a crucial lifeline. 
But none of this impresses investors. The company has made a raft of changes since its first tussle with activist shareholders when Third Point founder Dan Loeb took a stake in 2015. It has appointed current chief executive officer and Loeb favorite Ryuichi Isaka, scaled back its supermarket presence, sold the Sogo-Seibu department store chain and launched share buybacks.
But even so, the stock still trades around the same level as before Loeb announced his stake. Dissatisfaction with the recent market performance led to ValueAct Capital Management’s attempting to oust Isaka.  
Management’s most recent step has been an aggressive expansion of its convenience store business in the US, where it believes it can capitalise with a roll-out of Japanese-style food options. With the takeover bid, the concern will be the opposite in its home country – whose conbini still make up more than 40 per cent of Seven & i’s operating profit – that a Couche-Tard purchase will instead bring a subpar experience. 
Japanese consumers often decry the paucity of options and quality of service in overseas stores. That’s one reason retail in Japan has been a graveyard for more than one company over the years: From Walmart and Tesco to Carrefour (which Couche-Tard also attempted to buy), many have come to Japan with great pomp and plans to cut costs, only to find local consumers turn their noses up at what had worked elsewhere. 
As my colleague Chris Hughes has noted, for a takeover to be successful, Couche-Tard would need “to run the show better and extract those desired scale economies” – something that would put the focus on the nice-but-nonessentials list that make the conbini experience so beloved by tourists and TikTokers.
Despite operating far fewer stores than Seven & i, Couche-Tard is worth nearly twice as much as its target. And while much of that is down to the weak yen, it’s not the only factor. 
Assuming a formal bid materialises at all, it’s likely to face regulatory scrutiny. But management at Japanese firms of all stripes shouldn’t count on that to save them. The bid should serve as a warning: Improving corporate valuations is no nice-to-have option, like an unnecessarily delicious conbini egg sandwich, but instead is rapidly becoming a matter of existential concern.