Why 7-Eleven Is So Enticing To Circle K’s Owner
David C. Olson
Consulting & Technology Leader | Driving Innovation, Growth, and Optimization for Client Success | Collaborative, Client-Centric Focus on Measurable Business Outcomes
Canada’s convenience-store giant Alimentation Couche-Tard has a history of swinging at big acquisitions and missing. Its latest target: none other than Japanese 7-Eleven owner Seven & i Holdings. The deal may be a long shot, but one that may be worth taking.
The companies last week confirmed that Couche-Tard offered to buy Seven & i, without mentioning the offer price. The acquisition has major hurdles to clear—first, with Seven & i’s board and then with Japanese and U.S. regulators. There are a lot of reasons why Circle K’s owner, the second-largest operator in the U.S., would want to buy the country’s No. 1 chain.
For one, it might help Couche-Tard reach its ambitious financial targets. The company in October 2023 laid out a plan to grow its earnings before interest, taxes, depreciation and amortization by 11.7% a year on average through 2028. In its last fiscal year ended April 28, its Ebitda shrank, putting it behind its growth plan. A huge acquisition might help it catch up.
The U.S. convenience-store industry is very fragmented, which means growing through smaller acquisitions takes time. The majority of convenience stores are owned by operators that own up to 10 stores. Unlike other small-format retail, such as dollar stores, organically growing store count is difficult because building a gas station requires a lot more permitting and time, notes Anthony Bonadio, equity analyst at Wells Fargo.
There is good synergy potential from the deal.
Some 31% of Circle K stores have at least one 7-Eleven or Speedway (also owned by Seven & i) store within a 1-mile radius, according to analysis from RBC Capital Markets. That means there will be ample opportunities to cut costs—such as through consolidating deliveries to stores.
Of course, this means the deal would invite extra scrutiny from U.S. antitrust regulators. Notably, the proposed merger between supermarket giants Kroger and Albertsons has gone to court after the Federal Trade Commission sued to block the deal. Nevertheless, 7Eleven and Couche-Tard together would have a roughly 13% market share of the U.S. convenience-store market, not an astounding number.
Another reason 7-Eleven looks attractive: It has a highly popular food business in Asia, something that it is trying to import to the U.S., where selection has traditionally been limited to things like Slurpees and unexciting microwavable fare. 7-Eleven stores in Virginia started carrying chicken curry and bento boxes, while the Texas stores include Mexican rice and chicken fajitas.
Because fuel and cigarette sales aren’t reliable drivers of sales growth in the future, food has been a focus for convenience stores. Couche-Tard has been trying for years to spur more food sales, but success has been mixed, according to Bonadio.
Buying the global giant would come with a very profitable Japanese convenience-store business, which last fiscal year boasted operating margins of 27% compared with 3.5% margins for its overseas (primarily U.S.) business. This is because the Japanese business has a higher mix of franchises
领英推荐
and because it lacks the low-margin fuel business. Top-line and operating profit growth have been healthier in Japan than in the U.S. during the past year. Japan’s aging population, unfamiliar inflation pressures, and a slight shift to remote work might be working to 7-Eleven’s advantage as consumers look for nearby food options with value.
The wrinkle here is Couche-Tard has no experience in Asia, which could pose a challenge. Seven & i comes with a mixed bag of other businesses, including a sizable Japanese supermarket business with razor-thin margins.
It is unclear how Seven & i’s board will react to the deal. The companies haven’t disclosed the offer price, but before news of the deal surfaced, the Japanese conglomerate’s market capitalization was roughly $31 billion, and its shares looked cheap, trading at about 15 times forward-12-month earnings, 23% cheaper than Couche-Tard’s.
Seven & i shares jumped 16% since news of the takeover offer, but as a multiple of earnings they remain 7% cheaper than Couche-Tard. Couche-Tard said it has about $10 billion of capacity for an all-cash transaction (a third of Seven & i’s market value before the recent spike), so it might have to include an equity component on the deal in addition to taking on debt.
The company has come under activist-investor pressure to consider spinning off the convenience store business and to replace board members, including the chief executive, but fended that off—suggesting that it has the support of large shareholders. Seven & i has since sold off its department-store chain and launched a share-buyback program. The company might want to see its plans through or pursue a more radical restructuring before succumbing to a takeover.
The deal could end up being a tough sell for Seven & i shareholders and regulators, but it makes a whole lot of sense for the Canadian giant. As another famous Canadian Wayne Gretzky liked to say: You miss 100% of the shots you don’t take.
—
Jinjoo Lee
$31B - Seven & i’s market capitalization before news of a deal surfaced.