Battle for 7-Eleven could be tipping point for Japanese M&A

Canada’s Alimentation Couche-Tard has made a $47 billion offer for Seven & i, triggering a promised refocus on profitability by Seven & i management. A scion of the founding family has also proposed taking the company private in a leveraged buyout, though details have not been made public. Seven & i said it is considering all options on the table, but hasn’t provided a timeline for a decision.

The moves come amid a flurry of foreign-driven mergers-and-acquisition activity in Japan. The number of foreign acquisitions of Japanese companies increased by 19.1% between January and November compared with the same period a year earlier, according to Recofdata, an M&A database provider.

Statistics compiled by the firm for the past decade show a broad uptrend in dealmaking—including a bump during the pandemic years. The number of M&A deals rose 66.5% in 2023 compared with 2014.

A big part of that has been driven by Japanese companies selling off more noncore assets as they look to become more lean and efficient.

A weaker yen offers another catalyst for dealmaking. The currency has fallen some 30% versus the U.S. dollar since the beginning of 2022, making Japanese acquisition targets more attractive.

“It will be a great opportunity to acquire Japanese technology and services at a discount," said Hidenori Yoshikawa, a consultant at the Daiwa Institute of Research think tank. He sees scope for more investment banks to approach overseas companies with M&A ideas.

Another factor is the profitability gap between Japanese companies and their peers overseas.

“The fact that a company as big as Seven & i, in market cap terms, can find itself in the M&A crosshairs might come as a shock, but its profitability does pale in comparison with Couche-Tard," SMBC Nikko Securities quantitative analyst Keiichi Ito said in a research note.

The five-year average of Seven & i’s return on equity was around 7.5%, compared with 23% for Couche-Tard, according to data provider FactSet.

Seven & i declined to comment.

Analysts are already compiling lists of Japanese companies that could become prey to foreign bidders. Jefferies analysts have name-checked brewer Asahi Group, machinery maker Kubota, and household-equipment manufacturer Lixil.

“With a multitude of undervalued, fragmented and inefficiently managed businesses, Japan could become the most attractive M&A market globally," said Shrikant Kale, a quantitative strategist at Jefferies.

Kubota said, as a listed company, it is aware of the risk of being an acquisition target. “The current share price has not reached the level we would like to see," a Kubota representative said. “We will fully disclose our efforts to stakeholders and strive to improve our corporate value."

Despite its attractiveness, foreign firms have long struggled to break into the Japanese market, especially when going after iconic companies like Seven & i. They often face resistance from Japanese corporate boards that are largely made up of lifetime employees who typically don’t welcome radical changes like foreign acquisitions.

At Japanese companies, shareholder profit isn’t necessarily the priority, said Yoshikawa, the Daiwa Institute of Research consultant. Japanese corporate culture is more about community, with companies viewed as family-like institutions, he said. That differs from the U.S. where they are seen more as purely corporate entities.

In the U.S., “directors feel it’s their duty to sell to the highest bidder even if they offer one yen more," he said.

Successive governments and the country’s main exchange operator have tried to change this over years, pushing boards to be more sensitive to governance and shareholder concerns. Officials believe such reform can improve companies’ profitability and productivity, which would eventually help accelerate innovation.

Senior executives of large Japanese companies often include people who have spent their entire professional lives at the same company. That can create what critics say is an entrenched leadership that feels it has a personal stake in changes of ownership.

“It’s like a family for these people in the lifetime-employment system," Yoshikawa said. When faced with a takeover bid or pressured to get rid of unprofitable businesses, “there’s a sense of, ‘Are we really going to throw that away?’"

Seven & i’s chief executive, Ryuichi Isaka, joined 7-Eleven Japan in 1980 right out of college and has worked there ever since. In October, Isaka announced a plan to split off some businesses and focus on convenience stores.

The fate of the world’s largest convenience chain now depends on whether the founder of 7-Eleven’s parent and his fellows will be able to secure the cash needed to make the proposed management buyout.

No matter which way it goes, the tide on foreign acquisitions may not be reversed.

“With the Seven & ​i deal, Japan’s M&A cycle has finally ​crossed the Rubicon," Jefferies’s Kale said.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com