The Journal. - The Fight for 7-Eleven

Episode Date: November 19, 2024

Earlier this year, Canadian convenience store company Alimentation Couche-Tard put in a bid to acquire 7-Eleven. Then, management from inside 7-Eleven’s parent company, Seven & i, proposed a record-breaking buyout to counter. WSJ’s Jinjoo Lee on the drama around who will own the world’s largest convenience store chain.  Further Listening: -The Fight Over U.S. Steel and the Community Caught in the Middle  -Why the FTC is Challenging a $25 Billion Supermarket Merger  Further Reading: -The Fight for 7-Eleven Isn’t Just About Money  -Talk of a 7-Eleven Takeover Has Japan Worried About the Rice Balls  Learn more about your ad choices. Visit megaphone.fm/adchoices

7-Eleven. In America, it's home of the slurpee, the big gulp, coming in a rainbow of artificial colors, the big bite hot dog rotating under a heat lamp, bright yellow nacho cheese, rows of chips, shelves of candy bars. Yesterday, I popped into one by the office. All right, I'm in lower Manhattan and I'm about to go into a 7-Eleven. Definitely lots of soda and stuff that you'd expect in a normal 7-Eleven.

And like these, I don't even know what you call them. Like taquitos or something? Like crunchy with like cheese or chicken inside? And then you got your Big Gulp options here. My gosh, the Big Gulp is so big. I decided to pick up a classic Slurpee. I went with Coke flavored, with some cherry mixed in there as well.

Wow. It's, uh... really sugary, and, um... Hmm. I mean, it tastes good, I'm not gonna lie. But I don't think I could have more than one of these a decade, honestly. Ha ha ha. But I wasn't at 7-Eleven for culinary reasons.

I was there for journalism. Because right now, 7-Eleven is the subject of a major bidding war. A Canadian company really wants to buy it. And they're offering to pay a lot of money for it. But 7-Eleven is playing hard to get. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudson. It's Tuesday, November 19th.

Coming up on the show, why 7-Eleven doesn't want to sell. That's the powerful backing of American Express. Terms and conditions apply. Visit mx.ca slash business platinum. 7-Eleven was founded in Texas in 1927. It was originally called Southland Ice Company. In the 1940s, it changed its name to reflect its hours, 7 a.m. to 11 p.m. and the chain went on to become a convenient American icon. But there's a country that loves 7-Eleven even more than Americans do. Japan.

If you could describe 7-Eleven in Japan in one word, what would it be? Hmm. I don't know if magical is quite the word. Exciting, maybe? That's our colleague Jinju Lee. Even though 7-Eleven started in the U.S., it's been a Japanese company since the early 1990s. And Japan has more 7-Elevens than anywhere else in the world.

It's a brand that people really trust and it's a place that people regularly frequent. You know, for lunch, dinner, breakfast. If you go on YouTube and if you search for 7-Eleven Japan, you'll see so many raving reviews. You guys, 7-Elevens in Tokyo are literally next level. You get the crunchy seaweed, the perfectly cooked rice, and then just like a little bit of tuna inside.

I got this big breadstick that was filled with chocolate cream. It was so soft and fluffy. Strawberries and cream sandwiches, which are so good. It's stupid good. I don't, I don't know how else to describe it, but it's so good. No offense to the hot dog, but food at Japanese 7-elevens is much better. You can tell there's a lot of care taken in the quality of things. Like, they work with this like rice master in Kyoto

to select the best varietal of rice for their rice balls, for instance. For potato salads, they designed a specific peeler that removes the thinnest layer of potato skin possible so that they could really enhance the flavor. So yeah, 7-Eleven is a brand that's really loved by Japanese people. They really trust the quality of what 7-Eleven sells. And that brand love and great food is one of the reasons another company is trying to buy 7-Eleven. That company is a Canadian one, another convenience store giant called Alamantaseon Couchetard. In the U.S., Couchetard owns the convenience store chain Circle K,

which is the second biggest chain in the U.S. behind 7-Eleven. And Jinju says that right now, convenience stores are having a bit of an identity crisis. So, if you think about convenience stores in the US, they sell fuel, they sell cigarettes, they sell food, and fuel is a category that's sort of going to decline over time. Cigarettes, that's already a declining business. Food is where the profits are at. It's just better margins. For Couchetard, this is where 7-Eleven would come in, specifically Japanese 7-Eleven. So Couchetard wants to improve their food offerings, 7-Eleven has the expertise from

Japan and that would be very valuable. Just because they have a track record of running a very successful fresh foods business. Couchetard buying 7-Eleven would be a massive merger, and it would allow Couchetard to dramatically increase its market share. 7-Eleven has more than 80,000 stores worldwide. So, with this one move, Couchetard would become five times bigger than it is today. Couchetard began its pursuit of 7-Eleven in August, when it made an offer to 7-Eleven's parent company, a company called 7&i. Couchetard approaches 7-Eleven first in August, and they offer about $39 billion.

And 7& I rejected that offer and basically said, and this is in their words, they said the price was grossly undervaluing the company. And they also said there would be multiple regulatory barriers, particularly in the US. Isn't like regulators aren't going to let these two giants, number one and number two, combine in the U.S.? Yes, exactly.

When 7-Eleven turned them down, Couchetard came back and sweetened the deal by $8 billion, upping their offer to $47 billion. Seven and I is a publicly traded company, and Couchetard's new offer excited some of its investors. If you're a shareholder of Seven and I, then you would want the company to seriously entertain the deal. Unless the company can come up with a better plan that can bump the company's stock even more. Seven and I didn't respond publicly to the second CouchTard offer.

But then, in a new twist, management within Seven and I teamed up with Japanese investors and three Japanese banks to come out with a competing offer to keep 7-Eleven in Japanese hands. They came up with an offer to take the company private for $58 billion. $58 billion? If that deal went through, it would be the biggest leveraged buyout of all time. It was so big that it made Jinju wonder. You know, are they just like posturing? Just to try to get Kushtar to bid something higher? Or are they so averse to a foreign takeover that they are willing to put up that amount of money?

That's next. When a company goes private, it means it's taken off the stock market, and shareholders get a big payout. But for 7-Eleven, going private comes with a big downside. Debt. downside, debt. To take 7-Eleven private, its new owners would have to take on a lot of debt. Out of the $58 billion they're offering to pay, around two-thirds of the money would come from loans, and that debt will have to be repaid by 7-Eleven, meaning it might make it harder for the company to succeed. So why would they want to do it?

So from the perspective of 7-Eleven's current management, they might be skeptical that a foreign company with zero experience in Japan could run the business successfully. So can a Canadian company really understand the nuances of Japanese consumer preference and how to run a convenience store in Japan. And then there's also a general reluctance to sell a company that's kind of so core to their culture and to their everyday lives.

It's a matter of national pride almost. This sort of thing doesn't just happen in Japan, of course. This year, here in the U.S., the Biden administration opposed a deal for a Japanese company to buy U.S. steel. But historically, Japanese businesses have been much more skeptical of foreign acquisition offers, especially with a brand as beloved as 7-Eleven. Because if a foreign company can successfully buy Japan's largest convenience store chain, does that sort of open the door for other corporate crown jewels to get sold to the highest foreign bidder?

But this culture of protecting Japanese companies can sometimes result in bad business and poor returns for investors. And so in recent years, the Japanese government has tried to make some changes. It really started with former Prime Minister Shinzo Abe in the early 2010s. And they introduced measures to try to make companies more shareholder-friendly. They try to nudge companies to require more independent oversight of company executives to try to improve returns. Most recently, the largest stock exchange in Japan came out and said, hey, if your stock price gets too cheap, then you have to submit a plan to us outlining

how you're going to increase your valuation. Why would this stock exchange want that? Well, you want more investors coming in, right? You don't want your stocks to be undervalued. It also contributes to, you know, a lot of Japanese citizens own shares in these companies. You would want their wealth to increase. They're trying to make the stocks that are listed on there

more attractive so that they can attract more investment. What happens to 7-Eleven will be a big indicator of how well these reforms are working. Right now, the ball is in Couch-Tard's court. The company has to decide whether to increase its offer even more or drop the idea altogether. So what does all that say then? Given that background, the fact that Japanese companies tend to just sort of wave off takeover offers and that the government is trying to bring about these changes, what does that

say? Does that tell us anything about the fact that 7-Eleven's parent company put in this private bid? Well, I guess one way to read this buyout proposal is that Japanese companies really haven't changed that much. You know, like that they would rather do this risky, expensive deal to keep this crown jewel in their own hands. But actually, I think it's a good sign. Because the very bad sign would have been

if Seven and I just kept rejecting the takeover proposal and didn't do anything about it. But the fact that they're offering this alternative counterbid is a sign that they feel pressure to act on behalf of shareholders. So what do you think is gonna happen next? Well, we'll have to see what Couchthard comes back with. You know, there's, I guess, three potential scenarios.

Either Couchthard comes out with a stronger offer and 7-Eleven is sold to Couchthard or management does its buyout and then the company goes private. And the third option is that they reject Couchthard, the management buyout doesn't go through and the company just says, okay we're just going to continue on this path, we're not selling to anybody. But in that case it may be hard to fend off disgruntled investors. The company would really have to prove that they can deliver superior returns. That's all for today, Tuesday, November 19th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Megumi Fujikawa, Adriana Marchese, and Kosako Narioka. Thanks for listening. See you tomorrow.