Why does Couche-Tard want to buy 7-Eleven? It’s a ‘cheap’ stock, say portfolio manager

Alimentation Couche-Tard’s proposal to buyout 7-Eleven’s owner was likely driven by its affordability as a stock, in comparison to global counterparts, because there’s not much to improve when it comes to the core business of Seven & i Holdings Co., Richard Kaye, portfolio manager at independent asset management group Comgest, said Monday.

The Circle K operator offered to acquire its Japanese rival last month. The amount has not been disclosed, but should a deal go through, it could be the biggest-ever foreign takeover of a Japanese company.

On Friday, U.S. find Artisan Partners Asset Management urged Seven & i Holdings to “seriously consider” the buyout offer, and solicit offers for the company’s Japanese subsidiaries “as quickly as possible.”

The offer was made amid restructuring within the company, aimed at growing 7-Eleven’s presence globally as well as divesting its underperforming supermarket business.

“ACT is uniquely positioned to enhance (Seven & i’s) corporate value,” Artisan portfolio managers N. David Samra and Benjamin L. Herrick wrote in a letter, according to Reuters. “Negotiating with ACT is the best tactic to preserve positive stakeholder outcomes in Japan.”

Kaye disagreed in an interview on CNBC’s “Squawk Box Asia,” saying on Monday: “I don’t think there’s a case for a radical reform to be to be done by a foreign acquirer.”

The company is doing a “phenomenal job” in terms of logistics and product innovation” and “I think it’s very hard to assume that that could be done an awful lot better,” he added.

Kaye, however, acknowledged that the company could move faster to reform its other segments, such as its general merchandise stores.

But these businesses do not represent a detraction to Seven and i’s profit margins or capital return, he added. “What [ACT] probably sees is a cheap stock, if I can be very frank.”

Seven & i is currently trading at a 27.96 price-to-earnings ratio, and has a price-to-book ratio of 1.47, according to LSEG data.

ACT has about 16,700 stores globally, far fewer than Seven & i Holdings’ approximately 85,800 stores, but the Canadian firm commands a higher valuation of $54 billion as of Monday’s market close, compared with the Tokyo-listed company’s 5.26 trillion yen, or $38.3 billion.

The proposed deal is expected to attract anti-trust scrutiny in both countries, particularly in the U.S, a retail analyst recently told CNBC.

“I would imagine that there’s going to be some regulatory concern and some required divestment in order to make this [deal] work,” Bryan Gildenberg, managing director at Retail Cities, said on CNBC’s “Street Signs Asia” last month.

Bloomberg reported on August 27, citing people familiar with the matter, that Seven & i was seeking designation as a “core” company under the country’s Foreign Exchange and Foreign Trade Act, which will require Japan’s finance ministry to vet the entity seeking to acquire more than a 10% stake in a “core” company.

Such companies include those in the aerospace, nuclear energy and rare earths sector, the report added.

The move signals that Seven & i is worried an ACT buyout could damage its “very carefully designed, decades honed, very unique konbini business model, which 7-Eleven has developed in Japan and is now sort of re-exporting to the U.S,” Kaye said.

Konbini is a Japanese term used to describe the nation’s ubiquitous convenience stores.

Still, Kaye calls the stock a “buying opportunity” in a pool of stocks across the Japan-listed universe, that includes global companies such as Fast Retailing and Pan Pacific International Holdings, which runs the Don Quijote chain.

These are “companies which are doing great operations even on a global basis, but they’re cheaper than global counterparts,” he pointed out.