“A big bet”
The news comes as Couche-Tard’s current CEO, Brian Hannasch, will step down in two weeks to retire. The news of Couche-Tard’s move with the 7-Eleven convenience store operator has also sparked other reactions.
“It’s a big bet on several unfamiliar markets,” said analyst Vishal Shreedhar of National Bank Financial.
He says recent trends in merchandise sales call into question Couche-Tard’s “aggressive” targets set in the five-year plan presented last fall. “That may be what’s prompting management to pick up the pace with acquisitions,” Shreedhar said.
Couche-Tard said in October that it wanted to generate profits before interest, taxes, depreciation and amortization of US$10 billion in 2028, the equivalent of a compound annual growth rate of 12% over five years.
A company with diversified activities
Best known for its convenience stores, the holding company Seven & i is present in a wide variety of commercial activities. In addition to its convenience stores, it owns superstores, grocery stores and specialty stores (particularly children’s items). Seven & i is also present in food services and fast food, financial services and IT services.
Investors currently value Seven & i and its network of more than 85,000 stores at approximately $50 billion, equivalent to the market value of Loblaw, Canada’s largest grocer. By comparison, the market values Couche-Tard and its network of 17,000 stores at $75 billion.
The valuation gap between Couche-Tard and Seven & i can be explained in particular by the financial return generated. It can also be explained by what investors call the conglomerate discount, which means that a company with diversified activities is less well valued than the sum of its parts.
An old target of Alain Bouchard
Although there is no guarantee that the Laval company will be able to reach an agreement with its Japanese counterpart, it is common knowledge that businessman Alain Bouchard has had his eyes on 7-Eleven convenience stores for a very long time.
PHOTO PATRICK SANFAÇON, LA PRESSE ARCHIVES
Alain Bouchard in 2019
The biography of Alain Bouchard published in 2016 also includes a chapter entitled “7-Eleven in the crosshairs”.
“I would have been interested in buying 7-Eleven,” Alain Bouchard acknowledges in this book. It is mentioned that the founder of Couche-Tard went to Tokyo in the early 2000s to meet the CEO of Seven & i in the hope that he would agree to sell the American portion of his empire. But the Japanese were “not sellers,” we read.
Desire for diversification
The attempt to buy Carrefour three years ago to make a push into supermarkets led Couche-Tard’s bosses to reveal a desire to operate something other than convenience stores, a shift that would also make the company less dependent on gasoline sales.
With the acquisition of French food giant Carrefour, Couche-Tard was aiming for a rise in the top 5 global retail giant alongside Amazon, Walmart and Costco.
Management also revealed in 2021 that it had targeted several niches in which Couche-Tard could use its expertise to broaden its horizons in a natural and complementary way. Couche-Tard’s management continues today to see appeal in adjacent segments such as $1 stores, fast food and traveler retail (e.g. airports and train stations).
This desire to diversify into other sectors dates back several years before the Carrefour episode.
Metro, Dollarama, Jean Coutu, Liquor Barn and restaurant chains have all been targets discussed on numerous occasions in the upper echelons at Couche-Tard, according to our information. But each time, the conclusion, we are told, was that the cost of these acquisitions was too high, the synergies difficult to predict, and that the expertise was not in these sectors.
Seven & i in whole or in part?
Portfolio manager Philippe Côté, at Eterna Investment Management, doubts that the proposal made by Couche-Tard to Seven & i concerns all of the assets of the Asian group.
Firstly because of the size of the potential transaction. But also because it is a major Japanese company with many assets in the Land of the Rising Sun.
“I would be very surprised if the Japanese government let this company fall into foreign hands,” says Philippe Côté.
This specialist in Quebec companies listed on the stock exchange emphasizes that Seven & ia also has a structure with several franchised locations, which is not the historical operating mode of Couche-Tard, whose stores are largely owned by the company.
A potential giant leap
At its investor day in April, Seven & i management outlined its growth ambitions for its convenience stores. With 85,000 locations in around 20 countries today, the goal is to have 100,000 in 30 countries by 2030.
The acquisition of 7-Eleven convenience stores would suddenly give Couche-Tard 100,000 stores, which currently has 17,000 in its network.
“Considering the size of the acquisition target, the potential for synergies is significant,” observes Maxime Robillard, partner and principal analyst at Van Berkom.
These synergies typically come from reducing operating expenses per store, negotiating volume discounts with suppliers, and improving store sales and gross margin through the exchange of best practices, says TD analyst Michael Van Aelst.
What is Couche-Tard’s real target?
The bulk of the profitability generated by the Seven & i conglomerate comes from its core retail store operations in Japan and North America.
Couche-Tard approached Seven & i to discuss with a low offer, but with the ultimate goal of concluding a transaction only for certain assets, possibly in North America and Europe, according to Philippe Côté.
The U.S. convenience store market remains highly fragmented and therefore still holds potential opportunities. Seven & i management reported last spring that the top 10 players share just under 20% of the market, while in Japan the top three players (7-Eleven, FamilyMart and Lawson) control nearly 95% of the market.
Seven & i is already under pressure from some investors to split the company. Management has also mentioned in recent months that an initial public offering is being considered to spin off its department stores, mainly grocery stores, in order to maximize shareholder value.
Even if Couche-Tard were to succeed in acquiring only the North American 7-Eleven convenience stores, Philippe Côté believes that there would be a very long delay before the transaction is approved.
He points out that the acquisition offer by American food giant Kroger for grocer Albertsons announced in October 2022 has still not received regulatory approval. “One can imagine that the approval process for the approximately 13,000 7-Eleven locations in Canada and the United States would be lengthy and that several conditions would be attached to it.”
Bold, but logical
There is certainly logic to a transaction between Couche-Tard and Seven & i, believes portfolio manager Philippe Le Blanc at Cote 100.
“With such an acquisition, Couche-Tard would gain significant market share in the United States with the addition of the Speedway brand that it would have liked to acquire in 2020. In addition, a transaction would make it possible to drastically increase its locations in Asia where it still had little presence compared to other regions.”
He adds, however, that it would be a very big mouthful to swallow and digest. “It involves some work to improve the performance of Seven & i’s brands, not to mention the potential regulatory constraints.”