Analysis: 7-Eleven battle shows resilience of Japan Inc's family ties
11/12/2024 23:02
*
7-Eleven's founding family announced MBO amid takeover
drama
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Families still enjoy considerable influence in Japan
despite
small shareholdings
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Corporate governance reforms have made delisting
attractive to
family owners
By David Dolan and Rocky Swift
TOKYO, Dec 12 (Reuters) - A rise in shareholder activism
in Japan is poised to fuel a new wave of management buyouts by
founding families, after the battle for 7-Eleven's parent
company prompted a $58 billion takeover offer from the Ito
dynasty that built the retail giant.
Seven & i Holdings 3382.T Vice President Junro Ito swooped
in last month with an offer to take private the company founded
by his late father in what would be the largest ever management
buyout (MBO).
Ito's "white knight" bid appears designed to keep Seven & i
away from Canada's Alimentation Couche-Tard ATD.TO , which
announced a takeover proposal in August. The Circle K owner
raised its bid for Seven & i by about 22% to $47 billion in
October after its initial offer was rejected.
The scramble for Seven & i gives a taste of how deals are
likely to develop in the years to come, industry experts say, as
changes in Japan Inc's corporate governance standards make
delisting an increasingly compelling option.
A few years ago, companies could ignore unsolicited offers
because they were protected by cross shareholdings - the
practice of holding stakes in business partners to cement
relationships.
But those holdings are now being sold off under a government
push for better governance. Companies have also been told they
should give serious consideration to credible buyout offers.
"Managers can no longer ignore shareholders as they could in
the past. Cross shareholdings are being unwound all the time,"
said Travis Lundy of Quiddity Advisors who publishes on the
Smartkarma platform.
"MBOs are going to be more common," Lundy said, adding the
government's guidelines on giving consideration to buyout offers
were "a game changer".
ALL IN THE FAMILY
Last year, Japanese deals where management took stakes,
including MBOs, totalled $7.1 billion, the most in at least 36
years, LSEG data showed. The value has fallen from that peak
this year, but remains at $1.7 billion.
Among recent deals, educational publisher and nursing home
operator Benesse Holdings was taken private in an MBO by the
founding Fukutake family and Swedish private equity firm EQT.
Drugmaker Taisho Pharmaceutical was bought out by a member of
its founding Uehara family.
MBOs are becoming an attractive option because the
governance overhaul has created bigger burdens for listed firms,
while being a public company no longer confers the status it
once did, said Ulrike Schaede, a professor of Japanese business
at the University of California San Diego.
Schaede gives the example of Germany, where MBOs have become
a "new defence" against shareholder activism, adding that Japan
could start to see a similar trend, especially given private
equity's appetite for deals in the country.
Japan is hardly the only place where founding families hold
stakes and sway after the founder dies - and Seven & i not the
only global retailer in that position.
The family of Walmart WMT.N founder Sam Walton holds 45.5%
of the U.S. retailer, while the largest shareholders of Sweden's
H&M HMb.ST are Stefan Persson, son of the founder, and his
family.
SMALL STAKES
But Japan stands out because families are able to wield
considerable power despite holding small stakes.
Ito-Kogyo, the company tied to Junro Ito that is bidding for
Seven & i, holds only about 8.2% of the retailer.
Historically, family control of businesses in Japan has been
"more persistent than the very low equity ownership by founding
families would indicate", researchers from the University of
Copenhagen, the University of Alberta School of Business and
elsewhere wrote in a 2021 Journal of Financial Economics paper.
Some 10% to 30% of listed Japanese companies from the 1960s
to 2010 were managed by founding family heirs with "little
ownership to report", Morten Bennedsen, Vikas Mehrotra and their
co-authors found.
They pointed to examples such as the Toyoda family at Toyota
Motor Corp 7203.T , the Suzukis of Suzuki Motor Corp 7269.T
and the Kashios at Casio Computer 6952.T . Such families were
able to retain control via what the researchers called "soft
family assets", including their name and reputation.
"We certainly expect that the trend is continuing, there
is no sign it is changing," Bennedsen told Reuters.
One Seven & i investor recalled attending a meeting with
company executives including Junro Ito, who sat silent
throughout. The extent to which the Ito family wielded influence
and power within the company was "something of a mystery", said
the investor, who asked not to be named due to company policy.
A Seven & i spokesperson declined to comment.
At many companies the founder's legacy still looms large. In
recent years Seven & i resisted calls from foreign investors to
hive off its Ito-Yokado supermarkets' business out of respect
for founder Masatoshi Ito's vision, according to veteran Japan
retail analyst Michael Causton.
"The Ito legacy, as in many Japanese companies with a
charismatic founder, is an unwritten red line in the company
known to all executives," Causton said, adding that amounted to
preserving Seven & i as a conglomerate spanning supermarkets,
general merchandise and convenience stores.
It remains to be seen whether the Ito family will manage to
raise the funds needed for the deal - although it appears that
domestic banks are lining up with them.
What is clear is that more such deals are likely to happen,
something investors welcome.
"If the founding families in Japan really want to control
and influence their companies, then they shouldn't be listed and
instead taken private," the Seven & i investor said.
(Reporting by David Dolan and Rocky Swift; Additional reporting
by Anton Bridge and Ritsuko Shimizu; Editing by Kate Mayberry)
((mailto:david.dolan@thomsonreuters.com; +81 3 4563 2708;))