By Riccardo Colombo, Lorenzo Mirone and Federico De Rosa (Università Bocconi)
Overview of the deal
Acquirer: Seven & i Holdings (7-Eleven)
Total Transaction Size: $21bn
Closed date: Expected Q1 2021
Target advisor: Barclays and JP Morgan
Acquirer Advisor: Nomura, Credit Suisse
On August 2nd, 7-Eleven, an American subsidiary of Japanese retail group Seven & i Holdings (S&i), entered into an agreement with Marathon Petroleum Corp. to acquire Speedway, one of America’s biggest convenience store and gas station chains, for $21bn in cash. The deal includes a 15-year fuel supply of about 7.7 billion gallons a year for the almost 4000 gas stations acquired. The deal was nearly agreed upon in March, but S&i paused after offering $22bn. Following a $1B price reduction, as well as an effective price decrease for Seven & i Holdings due to the Japanese yen strengthening against the US dollar, deal negotiations closed. Global ambitions as well as significant anticipated synergies motivated the Japanese retail group to close the deal. With the acquisition, S&i aims to move its principal interests and business away from its country of origin, Japan, where declining population, a contracting economy, and tough competition on prices are becoming problematic, and focus on the US, which has significantly better demographics and macroeconomic indicators.The Japanese group has estimated synergies upwards of $475m due to strengthened purchasing power and other benefits of scale.
Marathon Petroleum Corporation agreed to sell Speedway under strong pressure from activist investors, worried about the significant decrease of profits connected to the low price of oil and shrinking demand. The $16.5bn post-tax return will boost shareholders’ returns and will be used to reduce a monstrous $30bn debt pile.
"This acquisition is the largest in our company's history and will allow us to continue to grow and diversify our presence in the US, particularly in the Midwest and East Coast" — Joseph DePinto, President and Chief Executive Officer of 7-Eleven
Company Details: Seven & i Holdings
Seven & i Holdings Co., Ltd. is a Japanese diversified retail group founded in 1920 with the name of Ito-Yokado, classified as of 2018 the 15th largest retail group in the world and listed on the Nikkei index in Tokyo. It now owns several different brands including 7-Eleven, Ito-Yokado, Seven Bank, Sogo & Seibu, Barneys New York in Japan, and more. As a whole, the company generates more than $60bn in annual revenues. S&i operates in multiple segments of retail, including convenience stores, superstores, department stores, specialty stores, and financial services.
Founded in 1920, headquartered in Tokyo, Japan
President and Representative Director: Ryuichi Isaka
Number of employees: 144,628
Market Cap: $29.03bn (as of 8/26/2020)
LTM Revenue: $60.64bn
LTM EBITDA: $3.87bn
Company Details: Speedway
A wholly-owned subsidiary of Marathon Petroleum Corporation (NYSE: MPC), Speedway is an American convenience store and gas station chain operating throughout the Midwest and East Coast, with dominance in Central Ohio. It was initially Speedway 79, a gas station chain owned by Aurora Oil of Detroit, and was purchased by Marathon (formerly the Ohio Oil Company) in 1959.
Founded in 1932, headquartered in Enon, Ohio, USA
CEO: Anthony Kenney
Number of employees: 40,230
LTM Revenue: $26.8bn
LTM EBITDA: $1.5bn
LTM EV/Revenue: 0.62x
LTM EV/EBITDA: 11x
Seven & i Holdings joined the latest M&A wave to build scale and cut costs, strategically preparing for a potential recession. Adding 3900 stores, the group will double its US operating profits to $2.2bn, with $40bn in revenue coming from petrol sales.
In financial markets, the deal was not welcomed by equity investors who remained wary due to persistently high volatility in the oil industry, in which Speedway operates. The 70% increase of the group’s borrowings following the deal resulted in Moody’s downgrade of the group from A1 to A2 level.
In the short-term, the deal will have a significant impact on the seller’s operations as well. In an effort to remedy the company’s chronic underperformance, Marathon Petroleum gave up on its only source of steady cash flow when it was needed the most. Pressured by activist investor Elliot Management, it sold its fuel retail branch as it became more exposed to the oil and refinery industry's large fluctuations. The backdrop becomes even more frightening and uncertain if considering the low-margin environment in which Marathon operates.
The target’s operating market, fuel retail, is likely what impressed investors as the deal comes amidst a global pandemic. The decision to buy a gas station business now is explained by Speedway’s convenience sales potential and Seven & i’s impellent need to offset declining profits in its home market, as Japan’s economy shrinks due to an ageing population as well as the COVID-19 pandemic. Indeed, in the long-term, the group plans to increase its share in the US convenience store market as demand for the sites’ coffee, fast food and grocery offerings increases, while demand for oil is projected to drop in the next ten years. The deal fuels a trend already under way, with North America accounting for 40% of the group’s sales in the latest fiscal year, up from roughly a third five years ago.
Hence, the deal will provide Seven & i Holdings with a strong competitive advantage resulting from economies of scale and synergies, giving the group a significant lead against its nearest rival Couche-Tard, which owns around 6,000 stores in the US.
Risks and Uncertainties
The first risk factor is related to the expected decline in demand for petrol. Fuel accounts for about half of Speedway's sales, and this could be a problem due to environmental regulations around the world encouraging consumers to switch to electric vehicles to reduce their carbon footprint. This trend could lead to a reduction in demand for petrol. For this reason, Seven & i wants to reduce Speedway's dependence on petrol and will do so gradually, as it expects its petrol retail business to remain strong and stable in the medium term. However, the objective is to shift the company's core business towards the food sector, as in the case of 7-Eleven stores in Japan, in order to reduce the impact of oil prices on the company's balance sheet.
For Seven & i, the second risk, linked to the first, is the growing influence of environmental, social and governance investments on the business (i.e. ESG criteria), precisely for reasons related to gasoline emissions and consequent pollution. The market's reaction to the buyout announcement was doubtful, evidenced by an 8% drop (compared to the previous week's closing) in Seven & i shares on the Tokyo Stock Exchange on the first day after the announcement.
The third risk is the fear of an overvaluation of the target company; in fact, analysts and investors have said that the purchase price is too high due to concerns about a global economic slowdown caused by the pandemic. In addition, the fall in fuel demand has led to a reduction in oil prices as more and more people work from home and avoid travel. As a result, investors are concerned about the uncertainty resulting from the coronavirus pandemic.
The sharp decline in Seven & i's earnings due to the effects of the COVID19 lockdowns, with profits down 73% to $131 million in the last quarter, did not prevent the acquisition from being completed. Forecasts for the fiscal year are down 45% to $1.1 billion in profits. The president of Seven & i, Ryuji Isaka, believes that the operation carried out by the company, i.e. expansion into the United States, is still profitable, regardless of any change in consumer habits and spending.
This is due to a sharp increase in online orders spurred by the pandemic. However, logistics networks are underdeveloped in many parts of the country (unlike Japan), leading to slower delivery times.
Given the significant amount of leverage added in the transaction, the financial risk is expected to increase. According to S&P, the debt/EBITDA ratio is expected to increase to 4, compared to 1.6 last year, pushing it closer to the end of the acceptable range.. However, the company expects to reduce its debt/EBITDA to 3x within two years of closing the deal.
“This is a historic first step as we seek to become a global retailer.” — Ryuichi Isaka, CEO of Seven & i Holdings