Newscasts - Japan’s M&A fail

Seven & I Holdings Co

31/07/2025 08:19

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Description: Tokyo wants firms to embrace dealmaking to boost the economy. In this Viewsroom debate, Breakingviews columnists explain why the $33 bln buyout of Toyota Industries and failed $46 bln bid for Seven & i offer a poor verdict on the value push.

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Video Transcript:

The views expressed on this podcast are those of the participants, not of Reuters News.

That芒聙聶s the thing, there is enough activity to be confident things are moving in the right direction, but Japan isn芒聙聶t a country with a lot of time. I mean, the economy is barely growing, population is shrinking, and they芒聙聶ve had decades of deflation, so they don芒聙聶t have time to waste. And so, the problem is, is that today, the guidelines are strong enough to force companies to change, Couche-Tard has forced Seven & i to change itself, but still weak enough to allow management to act in their self-interest rather than shareholders芒聙聶 interests. And that芒聙聶s the thing that needs to change. And it芒聙聶s these large, iconic deals that set the tone for everything else.

In recent years, Japan has been signaling to the world that it芒聙聶s open for business, and more importantly, inbound M&A. Well now there are two deals that we can look at to test that theory. So, there芒聙聶s one Toyota Group芒聙聶s attempted buyout of its key supplier, and Canada芒聙聶s Alimentation Couche-Tard and its failed $46 billion takeover of Seven & i. Now why are these deals failing? Why are they so complicated? And what do they mean for Japan芒聙聶s economy? Let芒聙聶s find out in this week芒聙聶s Viewsroom. It芒聙聶s Aimee, and it芒聙聶s the Viewsroom, the weekly podcast that answers the knottiest questions in corporate finance, business, and economics. And unfortunately, I don芒聙聶t have Jonathan with me today. When we芒聙聶re doing Asian podcasts, where we focus on Japan, it芒聙聶s quite hard to get the US, Asia, and Europe into the same conversation. So, it is just me, but I have Una Galani, who is Asia Editor of Breakingviews, and Antony Currie, who is based in Australia and is an Associate Editor. And they have both been really focusing on these deals quite a lot and know an awful lot about Japan, so I芒聙聶m very excited by this conversation. So, Una, Antony, you are very welcome to the Viewsroom.

Good to be here. Sorry Jonathan isn芒聙聶t committed enough to jump on this at 3:00 in the morning his time.

Indeed. Hi Aimee.

Hi Una. So, Una, as I said, you are the supremo Asian Editor here at Breakingviews. So can you explain these two Japanese deals, why they have captured so much attention, everywhere I think, but very specifically certainly at Breakingviews, I think our readers are really interested in these deals.

Yes, Aimee, I think we should take a step back here. I mean, investors have been really excited about Japan for the past couple of years, and that芒聙聶s spurred a really big stock market rally and record levels of deal activity. And there is a sense in Japan that all the stars are aligning for a new economic and corporate era in the country. So, Japan is exiting decades of deflation. It looks like the government芒聙聶s efforts to drive efficiencies in the economy, including by forcing Japan Inc. to behave in a way that is more shareholder-friendly, is yielding some fruit. And Japan has been on a mission basically for the last decade to try and make its companies use its resources more efficiently and be more welcoming of takeover proposals. The late Shinzo Abe, when he was prime minister, he kicked off this push. And it芒聙聶s really important because, with a shrinking population, it芒聙聶s the only way for the economy to grow. So, the two deals that you referred to, at Seven & i and Toyota Industries, they芒聙聶re both really interesting because they offer a verdict of sorts, really, on Japan芒聙聶s longstanding effort to move in this direction.

It's very interesting.

Yes, it芒聙聶s definitely a big question. I mean, I was at a conference a couple of months ago here where some of the big superannuation investors were asking this very question. Is this finally when Japan does what it芒聙聶s been talking about forever? I mean, I know I don芒聙聶t look it, but I芒聙聶m old enough to remember that, what was it, 2002, when J.C. Flowers and Ripplewood bought Long-Term Credit Bank, and it was meant to be, and yes it was a troubled bank, but also it was meant to be, like, yet another sign that maybe, just maybe, Westerners could come in and do something. And it just kept on sort of not living up to snuff, whereas now, maybe, just maybe, we芒聙聶re getting there.

So, Una, can you talk us through the corporate governance changes in Japan? So, what- are they enticing foreign investors? We can see certainly that there is interest in M&A, but is it doing what they hoped it would? Is it working, ultimately?

Yes, that芒聙聶s a great question. So, over the past decade and things move slowly in Japan. So, we do have to think about things over that time horizon. Japan has introduced a stewardship code. It芒聙聶s more recently introduced fair M&A guidelines. It is encouraging companies to weigh up takeover proposals with shareholders in mind. It sounds very basic but isn芒聙聶t in Japan. And Japan芒聙聶s stock exchange under its CEO Yamaji-san has been nudging companies to disclose plans to improve their valuations as a multiple of book value. He芒聙聶s basically been trying to embarrass companies that don芒聙聶t live up to this sort of value-push initiative. And this is all fair game in Japan because so many companies are undervalued, right? So, management have not focused on creating shareholder value. Companies sit on piles of cash. They芒聙聶re reluctant to shed underperforming businesses. They also feature a lot of something, we call them cross-shareholdings. And this is where large companies take strategic stakes in each other to fend off hostile bidders. So, there芒聙聶s been a lot of legislation or guidelines issued over the past decade to try and encourage companies to be more open to takeover proposals. Is that value push working? I mean, Japan芒聙聶s targeted M&A activity could hit a 10-year high this year. Domestic M&A activity is very, very strong, on the back of corporate restructuring. But if you just look at those two deals you芒聙聶ve flagged, you would reach the conclusion that it is not working.

So, Antony, Toyota. This is, I have to say, this is a deal that is really interesting, but I have to say, I芒聙聶m even struggling to kind of piece it all together and try and figure out what is happening here. So can you talk me through exactly what is happening, why this is so controversial?

Yes, I mean, it芒聙聶s the simplest deal known to humanity, I mean, come on. I mean, so look, the problem, I think the problem with explaining this is that for the vast majority of people.

Sarcasm alert, everybody, if you didn芒聙聶t hear that.

I don芒聙聶t know what that is. I芒聙聶ve never heard of that word. But the, I think for the vast majority of people outside of, outside of Japan, when they hear Toyota, they probably think Toyota Motor. And that芒聙聶s it. Well, the Toyota Group, which isn芒聙聶t a listed entity, it芒聙聶s an amalgam of sort of all the various entities. Toyota Group is made up of a bunch of different, I think almost two dozen different companies, listed and non-listed, mostly listed. Toyota Industries, which is the subject of this buyout, this $33 billion well it芒聙聶s a $40 billion buyout, depending on how you count the numbers is effectively the parent company to all the other companies. It was set up 100 years ago. Toyota Motor was spun out of it in the 1930s. It still actually provides a degree of servicing to Toyota Motors, I think it makes the RAV4 SUV, builds some engines, a few other things. I think 2% of Toyota Industries芒聙聶 top line still comes from Toyota Motor. But you芒聙聶ve got a bunch of other entities as well. There芒聙聶s Denso, Toyota Tsusho, all of which are involved in this deal as well, because they all have cross-shareholdings in each other. So, Toyota Motor and Toyota Industries are the largest shareholders in each other, right? Then Denso, Toyota Tsusho and a couple of others are smaller shareholders, and they also have stakes in them from Toyota Industries. So that makes this initially really difficult, but also a reason why this deal, on the face of it, ought to get done, because unlocking all of these cross-shareholdings is what all the new rules and regulations in Japan are meant to be about, right? So, number one, lots of cross-shareholdings, massive company with all these different company structures underneath it. Toyota Motor is involved not because it wants to buy its, what芒聙聶s, yes, it芒聙聶s its old parent, but is effectively a subsidiary because it owns 25% of Toyota Industries. It芒聙聶s involved, yes, because it owns 25%, but also, it芒聙聶s effectively financing this deal. It芒聙聶s providing the vast majority of the $6 billion in equity that is going into this buyout, and it芒聙聶s doing so by effectively swapping its 25% common equity stake with voting rights for preferred stock with no voting rights. And what that means, it芒聙聶s also giving a few funnies away that make life a bit easier for the main buyer in this, which we can get to in a minute, but it芒聙聶s basically allowing some of its stake not to be bought back by Toyota Industries until after the deal芒聙聶s done. So, you don芒聙聶t have to raise as much money, hence the $33 billion, $40 billion difference I mentioned earlier. So, they芒聙聶re really helping out here, Toyota Motor, but they won芒聙聶t end up officially running the buyout. That goes to yet another Toyota company, Toyota Fudosan, which until now has been known as this sort of, I wouldn芒聙聶t say shadowy, it芒聙聶s not shadowy, it芒聙聶s just, no one really talks about it. It芒聙聶s seen as like the, the family芒聙聶s, the Toyota family芒聙聶s real estate and investing company. It芒聙聶s unlisted. 80% of it is owned by, some five of the biggest Toyota companies, including Toyota Industries, which owns, I think, 20%-ish, I芒聙聶m going to say. So, it really is sort of, the cross-shareholdings are still in existence in a different form after this deal is done. So, Toyota Fudosan will end up basically controlling it for a very small equity stake, and the third player in this buyout, Toyota Motor芒聙聶s funding most of it, Toyota Fudosan funding a bit, and also basically running it officially, the third player is Akio Toyoda, who芒聙聶s the official head of the family and also the chair of Toyota Motor. He芒聙聶ll end up with about a 0.5% stake in Toyota Industries which is about 10 times what he芒聙聶s got at the moment, and he芒聙聶s reinvesting the money he芒聙聶s getting from selling his shares in the deal. So, he芒聙聶s not really adding any money in. Nor, in fact, is Toyota Fudosan, but, hey, let芒聙聶s not get bogged down in complexities.

I mean, effectively, this is a time when activists are circling Japan, and a lot of companies that are underperforming, or that look like they may have lots of sort of hidden value to unlock, are coming under the attention of activists. And so if you are a large sprawling Japanese conglomerate, where the connection between all your separately listed companies relies on cross-shareholdings and a wink, wink, nod, nod, we芒聙聶ve done business forever haven芒聙聶t we type of scenario, then this is the time and the moment that you have to pre-emptively defend those positions. So, on the one hand, Japan, under the stock exchange, is pushing companies to unwind their cross-shareholdings. But if you unwind the cross-shareholdings, then what binds you together anymore or what protects you as a company? And so effectively, Japan Inc., Toyota Motors, or Toyota Group, is closing rank, and they芒聙聶re sort of just sort of, they芒聙聶re doing this now because the environment around them is changing and if they don芒聙聶t do it now, then they could lose control of this company.

I suppose that芒聙聶s why this is very interesting in a way, right? Because as you芒聙聶re saying, Una, if you were to do what I suppose the activists and what the Japanese government and regulators want, is that these things would be unraveled or they would be made final in some way. But that sort of unravels the way Japan has been operating, that Japan Inc. has been operating. So, I think that is a really kind of fascinating element of all of this.

It芒聙聶s almost as if it芒聙聶s, like, the stock exchange and others are allowing a degree of transition, right, into a new entity. So, I mean, the other the other weird things about this so, first of all, Toyota Industries has suddenly stopped paying dividends, right? This deal isn芒聙聶t closing until December. So, if you芒聙聶re a shareholder, you don芒聙聶t get dividends anymore. Also, all the stakes that are being bought back off Toyota Industries, that芒聙聶s, by the other Toyota Group companies, that isn芒聙聶t happening till after the deal芒聙聶s done either. So yes, current shareholders, independent shareholders are getting a 23% premium to the undisturbed price when no one cared about the company, and it was all about Toyota Motor, the Toyota Motor stake. But most of that money then goes to the new owners, Toyota Group, which can then use it to pay off three-quarters, if they wanted, three-quarters of the $20 billion of debt they芒聙聶re borrowing to do this deal. So, it芒聙聶s all done to make it much easier for Toyota Group to do this deal, and then don芒聙聶t forget the shareholdings, 43% is owned by the Toyota Group in total, add in all the sort of friendly corporations who also own stakes, you芒聙聶re looking at 55%, I think, owning Toyota Industries. It芒聙聶s going to be pretty hard to stop this deal.

The other problem with this deal is that you芒聙聶ve got, Japan- Toyota Motor is Japan芒聙聶s largest listed company. And so, if there is, or should be, any flag bearer of Japan芒聙聶s value push, it ought to be the largest listed company in the country. But Toyota Motor has actually been a bit of a holdout in this broader embrace of the shareholder value push in Japan. I mean, the company芒聙聶s shares have actually done well, and it芒聙聶s not a laggard of the index by any means. But it芒聙聶s sort of dragged its feet in subscribing to some of the initiatives that the Tokyo Stock Exchange has had in terms of using the sort of shareholder value, that language that the exchange wanted them to embrace. And the other thing was that the offer for Toyota Industries that was put forward was below the last closing share price. So, on the face of it as well, there was a big outcry in Japan because, hang on, this is supposed to all unlock value, and you芒聙聶ve just put a lowball offer on the table that, as Antony芒聙聶s just explained, can芒聙聶t really be blocked. And it芒聙聶s very, very complicated deal. You know, multiple, multiple companies, a lot of creative financing, engineering, all to just get the result that Toyota Motors wants, which is, Toyota Motors, or Toyota Group wants, which is more control of the company.

Well, listen, we could talk about this all day. And I think it芒聙聶s definitely fascinating. But we have another deal, Una, which I芒聙聶m very, very keen to chat to you about, which is, we have Alimentation Couche-Tard, which, if you don芒聙聶t know this company, they own lots of petrol forecourts, they芒聙聶re a Canadian company, and they were desperate to buy the owner of 7-Eleven. Again, everyone kind of knows those convenience stores in the US. But this is actually the Japanese convenience store operator. So again, Una, this is just obviously very different to Toyota, but can you explain why the Canadian buyer, why Couche-Tard was so keen on buying this company? And then I guess we can get to exactly what happened then.

Yes, I mean, so Couche-Tard owns the Circle K convenience stores in the US, as you said, and they were interested in buying Seven & i because Seven & i has a very large North American business, as a lot of Japanese companies do. Seven & i has a very large footprint in the US because it bought Speedway gas stations for $20 billion in 2020. And Couche-Tard lost out on that acquisition to Seven & i. So pretty much since then, they have been quietly keen on Seven & i. And so, Couche-Tard was willing to pay $46 billion for the Japanese company, a nearly 50% premium to the undisturbed share price. That芒聙聶s compelling by any measure. It had even signed a non-disclosure agreement. But Couche-Tard basically walked away this month after nearly a year-long public effort to buy this company, because they said there had been no sincere or constructive engagement for the company. And they sort of published this 1,000-word letter of disapproval, you know, just kind of complaining about how the Japanese company had treated them. And it芒聙聶s pretty shocking because Seven & i did make a bit of a show about appointing a special committee to assess the offer. But it was an open secret in Tokyo that Seven & i did not want to be bought. You know, when people tried to claim that it would pose a national security threat to Japan if the 7-Eleven stores fell into foreign ownership. I mean, Seven & i didn芒聙聶t do much to quash that idea, at all. So, the founding and there was also, the founding family also tried to launch a buyout of the company in the midst of all of this, which failed.

The founding company of Seven & i?

Yes, exactly. The Ito clan. And so that was obviously, well, that spoke volumes really.

Yes, they launched it and then had to pull back. But they threw out a bunch of sops to shareholders as well, right, so they芒聙聶re going to try and list the US business and raise some money that way. They got a new CEO. There芒聙聶s a few other things they芒聙聶ve done, actually some of which they talked about already, but they芒聙聶ve been trying to do their own version of raising shareholder value, but it seems, if we believe what Couche-Tard said, and I think we probably largely do, it芒聙聶s pretty rare for a company to write a long screed that actually hasn芒聙聶t happened, about something hasn芒聙聶t actually happened. So, if you believe that芒聙聶s happened, then basically, it芒聙聶s just been a year-long waste for a very nice, easy-going Canadian company to get nowhere.

Yes, I mean, I guess Antony芒聙聶s saying it芒聙聶s not entirely back to square one for Seven & i though, right? So, they芒聙聶ve brushed off this bid. But they have been forced to change quite a lot, right? So, they have announced disposals, they promised to return a lot of cash. They芒聙聶ve even replaced their CEO with a foreigner. That probably would never have happened before, in the old Japan Inc. But investors are now paying more attention to underperformance. So, this is the upshot of that.

So, we started this conversation out to sort of ask the question, or answer the question, about whether the changes Japan has been trying to make to M&A have actually worked. And so, what I芒聙聶m getting from this conversation, and you guys can tell me if I芒聙聶m wrong about this, but it seems like it芒聙聶s baby steps, right? It芒聙聶s not going to be any big deal that sort of, like, signifies Japan has then moved on to this point, where a foreign buyer can come in and just easily take it, or, that you have a company that芒聙聶s very clean in terms of like what it owns and its subsidiaries, that it芒聙聶s very, for an activist, for example, as you said, Una, that they can see what a company owns in a very kind of like linear, obvious way. Would you kind of say that we芒聙聶re just at the very beginning of that?

Yes, I would just argue that, and I just want to put this out there, is that I think Couche-Tard could have tried harder, right? So, they could have gone hostile and taken their offer to Seven & i directly to shareholders. And that would have been the real test of Japan芒聙聶s shareholders. Like, let芒聙聶s see what shareholders actually vote for. Will they vote for their own self-interest if given the opportunity directly? So, Couche-Tard never formalized its offer. And I think a lot of that was wrapped up in this idea that, I mean, obviously, there were some competition approvals that they would have needed in the US and that was a complex issue, but a lot of it was also wrapped up in this idea that cultural consensus in Japan, you don芒聙聶t want to scare off the management. Management is really hard to, good management is very hard to come by in Japan. There芒聙聶s obviously less and less people these days. So, the talent pipeline reflects that. But I do think, yes, I mean, Japan芒聙聶s economy is barely growing at all. So, Japan needs to do something. If Tokyo wants Japan Inc. to behave in a different way, they芒聙聶re going to have to turn some of these guidelines that they芒聙聶ve issued into rules with teeth. And it芒聙聶s pretty much as simple as that. Tokyo has to decide what they want Japan Inc. to do and then put some teeth behind that.

Antony, what芒聙聶s your take? You think we芒聙聶re at the very beginning of this? Is this hopeful? Are there any big lessons we can learn from this?

I go back to what these big shareholders were talking about down at this event I went to recently. Is it real or is it not? It芒聙聶s certainly a lot more real. There芒聙聶s a lot happening, as Una pointed out earlier on. You know, activists were involved in Seven & i before Couche-Tard came along. You know, an activist is involved in, a Western activist I think, is involved in Toyota Industries. Whether they芒聙聶ll have much luck is another matter. I think actually that Couche-Tard probably had more luck as an activist than the activists did. So, it is tricky. Like I said earlier, I think that the Toyota Industries deal sort of smacks of some kind of almost like a transition deal. So, we芒聙聶re moving from what used to be the old ways to the new ways. But if we can just get what we can get out of this deal now, Toyota Group, before we get to the new ways, won芒聙聶t that be great? And the stock exchange and the regulators are basically allowing them.

That芒聙聶s the thing.

As Una was saying, you need more teeth.

That芒聙聶s the thing, there is enough activity to be confident things are moving in the right direction. But Japan isn芒聙聶t a country with a lot of time. I mean, the economy is barely growing, population is shrinking, and they芒聙聶ve had decades of deflation. So, they don芒聙聶t have time to waste. And so, the problem is, is that today, the guidelines are strong enough to force companies to change. Couche-Tard has forced Seven & i to change itself, but still weak enough to allow management to act in their self-interest rather than shareholders芒聙聶 interests. And that芒聙聶s the thing that needs to change, and it芒聙聶s these large, iconic deals that set the tone for everything else.

Amazing. Very interesting. Thank you, Antony, thank you Una, really, really love that.

Pleasure.

Thanks for tuning in. This podcast was produced by Sheryl Pe脙卤a in New York and Gregory Garner in Toronto. You can listen to a new episode of the Viewsroom every Thursday on the Reuters app or your favorite platform. And don芒聙聶t forget to tune in to our sister podcast, The Big View, every Tuesday, as well as the other great podcasts from the Reuters team. If you like what you heard, please follow the Viewsroom and let us know what you thought. And check out our views on the biggest stories in business and finance every day at Breakingviews.com and Reuters.com.