Seven & i defence calls for radical strategy

SINGAPORE, Sept 23 (Reuters Breakingviews) – Rebuffing a low-ball, unsolicited, $39 billion takeover proposal from Alimentation Couche-Tard  was a straightforward,  task for Seven & i (3382.T). However, the resulting 20% surge in the Japanese target’s stock price puts it under pressure to lay out a compelling plan to improve its returns. That will be critical to shoring up its defense if its suitor tries to take an offer directly to shareholders.

The operator of 7-Eleven convenience stores has been streamlining its business after coming under pressure from U.S. activist ValueAct. It refreshed its board in 2022 and the following year completed the sale of its department stores and announced the closure of dozens of Ito-Yokada supermarkets. In April, CEO Ryuichi Isaka laid out a plan to list its underperforming superstores business as soon as 2026; this enterprise could be worth up to $2 billion, or five times the estimated EBITDA for the financial year to the end of February 2025, per JPMorgan’s estimates.

These actions are more like tinkering at the edges rather than a proper restructuring. That shows in its stock-market performance, with the company notching up a 5% negative total return to shareholders between installing more independent directors and last month’s pre-bid share price. The Topix index has returned 45% over the same period. If Isaka doesn’t want to sell but does wants to keep the stock’s upward momentum since Couche-Tard showed interest, he will need to implement a more radical overhaul.

One option for Seven & i is to take a leaf out of its suitor’s playbook and further bulk up in convenience stores. This core business, which already generates 90% of EBITDA, offers the most growth potential, partly because it’s mainly outside Japan. The retailer is still digesting the $21 billion purchase of Speedway stores in North America completed three years ago. However the U.S. market remains fragmented, so bolt-on acquisitions may be possible.

Isaka could also consider separating out convenience stores from the rest of the sprawl, which includes superstores, a bank, a music store and a shiitake mushroom producer. That would require an about-face, though. It’s what ValueAct originally pushed for, and the Japanese group argued that its supermarkets give it a competitive edge in food products at its convenience outlets.

Absent a sale or big changes like these, investors have little to look forward to: Seven & i is expected to deliver tepid revenue and EBITDA growth for the next four years, LSEG data of analyst forecasts show. Couche-Tard’s unsolicited bid is the right moment for Isaka to up his game.