The Fight for 7-Eleven

Summary

The Fight for 7-Eleven: A Detailed Summary

Podcast: The Journal
Hosts: Ryan Knutsen and Jinju Lee
Release Date: November 19, 2024
Produced by: Spotify and The Wall Street Journal

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1. Introduction to 7-Eleven’s Cultural Significance

The episode opens with Ryan Knudsen providing a vivid description of a typical American 7-Eleven store, highlighting its iconic products like the Slurpee, Big Gulp, and various snacks (00:06). This sets the stage for discussing 7-Eleven’s deep-rooted presence in American daily life.

Ryan Knudsen:
“Yesterday, I popped into one by the office... But I wasn't at 7:11 for culinary reasons. I was there for journalism.” (00:06)

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2. The Bidding War: Couche Tard's Pursuit

Ryan introduces the central narrative: a significant bidding war involving 7-Eleven. The Canadian company, Alimentation Couche-Tard, which owns the Circle K chain, has shown keen interest in acquiring 7-Eleven's parent company, 7-Eleven Japan Co., Ltd.

Ryan Knudsen:
“Right now, 711 is the subject of a major bidding war. A Canadian company really wants to buy it, and they're offering to pay a lot of money for it. But 711 is playing hard to get.” (00:06)

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3. 7-Eleven’s Evolution and Japanese Dominance

Originally founded in Texas in 1927 as Southland Ice Company, 7-Eleven rebranded in the 1940s to reflect its extended hours of operation. While it became an American convenience store staple, Japan embraced and expanded the brand more fervently, making it the country with the highest number of 7-Eleven stores globally.

Jinju Lee:
“It's a brand that people really trust, and it's a place that people regularly frequent... 7-Elevens in Tokyo are literally next level.” (03:44)

Notable Features in Japan:

• Superior food offerings, including items like crunchy seaweed rice balls and soft, fluffy breadsticks filled with chocolate cream.
• Collaboration with local experts, such as rice masters in Kyoto, to maintain high-quality standards (04:05).

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4. Couche-Tard’s Strategic Interest

Couche-Tard aims to leverage 7-Eleven Japan's expertise in fresh food offerings to enhance its own operations. Acquiring 7-Eleven would significantly boost Couche-Tard’s market share, as 7-Eleven boasts over 80,000 stores worldwide.

Jinju Lee:
“Couche-Tard wants to improve their food offerings. Seven eleven has the expertise from Japan... they have a track record of running a very successful fresh foods business.” (06:35)

Ryan Knudsen:
“Couche-Tard buying 711 would be a massive merger and it would allow Couche-Tard to dramatically increase its market share.” (06:50)

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5. The Initial Offer and Rejection

In August, Couche-Tard made an initial offer of approximately $39 billion to acquire 7-Eleven’s parent company, 7-Eleven Japan Co., Ltd. However, 7-Eleven rejected this offer, labeling it as “grossly undervaluing the company” and citing multiple regulatory barriers, particularly within the U.S. market.

Jinju Lee:
“Couche-Tard approached 7-Eleven first in August and they offer about $39 billion and 7 and I rejected that offer... there would be multiple regulatory barriers.” (07:17)

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6. Couche-Tard’s Enhanced Offer

Undeterred by the rejection, Couche-Tard increased its bid by $8 billion, bringing the total offer to $47 billion. This revised proposal garnered excitement among some of 7-Eleven Japan’s investors.

Jinju Lee:
“Couche-Tard approached 7-Eleven first in August and they offer about $39 billion and 7 and I rejected that offer... say the price was grossly undervaluing the company.” (07:17)

Note: Ryan does not provide a timestamped quote here, but he explains the increase in the offer.

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7. 7-Eleven’s Counteroffer: Going Private

In response to Couche-Tard's increased bid, 7-Eleven’s management, in collaboration with Japanese investors and three Japanese banks, proposed a competing offer to take the company private for $58 billion. This would constitute the largest leveraged buyout in history, with approximately two-thirds of the funding derived from loans.

Ryan Knudsen:
“When a company goes private, it means it's taken off the stock market and shareholders get a big payout. But for 7 11, going private comes with a big debt.” (10:16)

Jinju Lee:
“...are they so averse to a foreign takeover that they are willing to put up that amount of money?” (09:01)

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8. Cultural and Economic Implications

The episode delves into the cultural resistance within Japan against foreign takeovers of beloved domestic brands. This reluctance is intertwined with national pride and concerns over maintaining control over a significant cultural icon.

Jinju Lee:
“From the perspective of seven eleven's current management, they might be skeptical that a foreign company with zero experience in Japan could run the business successfully.” (10:52)

Ryan Knudsen:
“This sort of thing doesn't just happen in Japan, of course. This year here in the U.S. the Biden administration opposed a deal for a Japanese company to buy U.S. steel.” (11:31)

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9. Japanese Corporate Reforms and Shareholder Pressure

Traditionally, Japanese companies have been hesitant to entertain foreign acquisitions, often prioritizing stability over aggressive shareholder returns. However, recent reforms initiated by former Prime Minister Shinzo Abe aim to make companies more shareholder-friendly, encouraging independent oversight and measures to prevent stock undervaluation.

Jinju Lee:
“They introduced measures to try to make companies more shareholder friendly... require more independent oversight of company executives.” (12:20)

Ryan Knudsen:
“They try to make the stocks that are listed on there more attractive so that they can attract more investment.” (13:09)

These reforms are crucial in understanding 7-Eleven’s management’s willingness to counter Couche-Tard’s offers, signaling a shift towards balancing cultural preservation with investor interests.

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10. Potential Outcomes and Future Prospects

The episode outlines three possible scenarios moving forward:

1. Couche-Tard Increases Its Offer: Leading to the acquisition of 7-Eleven Japan.
2. 7-Eleven Proceeds with the Buyout: Taking the company private with significant debt obligations.
3. Rejection of Both Offers: Maintaining independence but facing pressure to deliver better financial returns to satisfy investors.

Jinju Lee:
“There’s, I guess, three potential scenarios... they reject Couche-Tard, the management buyout doesn't go through, and the company just says, okay, we're just going to continue on this path.” (14:53)

Ryan Knudsen:
“What happens to 711 will be a big indicator of how well these reforms are working.” (13:34)

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11. Conclusion: Indicators of Broader Economic Trends

The outcome of this bidding war is not just about 7-Eleven but also serves as a barometer for the effectiveness of Japan’s recent corporate reforms. A successful management buyout indicates a move towards greater shareholder accountability, while a foreign acquisition could signal increased globalization of Japanese businesses.

Jinju Lee:
“The fact that Japanese companies tend to just sort of wave off takeover offers... Does that tell us anything about the fact that seven Eleven's parent company put in this private bid?” (14:11)

Ryan Knudsen:
“If the competing counter bid is successful, it shows that Japanese companies are evolving to balance cultural integrity with investor pressures.” (14:50)

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Key Takeaways:

• 7-Eleven’s Dual Identity: While an American brand, its Japanese operations hold substantial global influence.
• Strategic Acquisition: Couche-Tard aims to harness 7-Eleven Japan’s success in fresh food to enhance its own market position.
• Cultural Resistance vs. Corporate Reforms: Balancing national pride with the need for shareholder value is at the heart of the ongoing negotiations.
• Future Implications: The resolution of this bidding war will provide insights into Japan’s evolving corporate landscape and its openness to foreign investments.

Notable Quotes:

• Ryan Knudsen:
  “But I wasn't at 7:11 for culinary reasons. I was there for journalism.” (00:06)
  “When a company goes private, it means it's taken off the stock market and shareholders get a big payout.” (10:16)

• Jinju Lee:
  “7-Elevens in Tokyo are literally next level... It's so good.” (03:44)
  “Couche-Tard wants to improve their food offerings. Seven eleven has the expertise from Japan.” (06:35)
  “From the perspective of seven eleven's current management, they might be skeptical that a foreign company with zero experience in Japan could run the business successfully.” (10:52)

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Additional Reporting By:
Megumi Fujikawa, Adriana Marqueze, and Kosako Narioka

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This episode of The Journal provides an in-depth analysis of the high-stakes battle over 7-Eleven, intertwining business strategy with cultural dynamics, and highlighting the broader implications for Japanese corporate practices and global business trends.

Transcript

[Ryan Knudsen]

7:11 in America. It's home of the Slurpee. The Big Gulp coming in. A rainbow of artificial colors. The Big Bite hot dog rotating under a heat lamp. Bright yellow nacho cheese, rows of chips, shelves of candy bars. Yesterday, I popped into one by the office. All right, I'm in lower Manhattan and I'm about to go into a 7 11. Definitely lots of soda and stuff that you'd expect in a normal 7 11. And like these, I don't even know what you call them. Like taquitos or something like crunchy with, like, cheese or chicken inside. And then you got your Big Gulp options here. My gosh, the Big Gulp is so big, I decided to pick up a classic Slurpee. I went with Coke flavored with some cherry mixed in there as well. Wow, it really sugary. And I mean, it tastes good. I'm not gonna lie. But I don't think I could have more than one of these a decade, honestly. But I wasn't at 7:11 for culinary reasons. I was there for journalism. Because right now, 711 is the subject of a major bidding war. A Canadian company really wants to buy it, and they're offering to pay a lot of money for it. But 711 is playing hard to get. Welcome to the Journal, our show about money, business, and power. I'm Ryan knudsen. It's Tuesday, November 19th. Coming up on the show, why 711 doesn't want to sell.

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[Ryan Knudsen]

Applause 711 was founded in Texas in 1927. It was originally called Southland Ice Company. In the 1940s, it changed its name to reflect its hours 7am to 11pm and the chain went on to become a convenient American icon. But there's a country that loves 711 even more than Americans do. Japan. If you could describe 711 in Japan in one word, what would it be?

[Jinju Lee]

Hmm. I don't know if magical is quite the word. Exciting, maybe.

[Ryan Knudsen]

That's our colleague Jinju lee. Even though Seven Eleven started in the US it's been a Japanese company since the early 1990s. And Japan has more Seven Elevens than anywhere else in the world.

[Jinju Lee]

It's a brand that people really trust, and it's a place that people regularly frequent, you know, for lunch, dinner, breakfast. If you go on YouTube and if you search for 711 Japan, you'll see so many raving reviews. You guys, 7Elevens in Tokyo are literally next level. You get the crunchy seaweed, the perfectly cooked rice, and then just like a little bit of tuna inside. I got this big breadstick that was filled with chocolate cream. It was so soft and fluffy. Strawberries and cream sandwiches, which are so good. It's stupid good. I don't know how else to describe it, but it's so good.

[Ryan Knudsen]

No offense to the hot dog, but food at Japanese 7 11s is much better.

[Jinju Lee]

You can tell there's a lot of care taken in the quality of things. Like they work with this, like rice Master in Kyoto to select the best varietal of rice for their rice balls. For instance, for potato salads, they designed a specific peeler that removes, like, the thinnest layer of potato skin possible so that they could really enhance the flavor. So, yes, seven eleven is a brand that's really loved by Japanese people. They really trust the quality of what seven eleven sells.

[Ryan Knudsen]

And that brand love and great food is one of the reasons another company is trying to buy seven eleven. That company is a Canadian one. Another convenience store giant called Alimentation Couch tard in the U.S. couche Tard owns the convenience store chain Circle K, which is the second biggest chain in the US behind 7 11. And Jinju says that right now, convenience stores are having a bit of an identity crisis.

[Jinju Lee]

So if you think about convenience stores in the U.S. they sell fuel, they sell cigarettes, they sell food. And fuel is a category that's sort of going to decline over time. Cigarettes, that's already a declining business. Food is where the profits are at. There's just better margins.

[Ryan Knudsen]

For Couchtard, this is where seven eleven would come in. Specifically Japanese seven eleven.

[Jinju Lee]

So Couchtard wants to improve their food offerings. Seven eleven has the expertise from Japan. And that would be very valuable just because they have a track record of running a very successful fresh foods business.

[Ryan Knudsen]

Kushtard buying 711 would be a massive merger and it would allow Couchtard to dramatically increase its market share. Seven Eleven has more than 80,000 stores worldwide. So with this one move, Couche Tard would become five times bigger than it is today. Couche Tard began its pursuit of 7Eleven in August when it made an offer to 7Eleven's parent company, a company called 7&I.

[Jinju Lee]

Couched approaches 7Eleven first in August and they offer about 39 billion doll and 7 and I rejected that offer and basically said, and this is in their words. They said the price was grossly undervaluing the company. And they also said there would be multiple regulatory barriers, particularly in the U.S.

[Ryan Knudsen]

Is it like regulators aren't going to let these two giants, number one and number two, combine in the U.S. yes, exactly. When 711 turned them down, Couche Tard came back and sweetened the deal by 8 billion, upping their offer to $47 billion. Seven and I is a publicly traded company and Couche Tard's new offer excited some of its investors.

[Jinju Lee]

If you're a shareholder of seven and I, then you would want the company to seriously entertain the deal. Unless the company can come up with a better plan that can bump the company's stock even more.

[Ryan Knudsen]

Seven and I didn't respond publicly to the second Couche Tart offer. But then in a new twist, management within seven and I teamed up with Japanese investors and three Japanese banks to come out with a competing offer to keep 711 in Japanese hands.

[Jinju Lee]

They came up with an offer to take the company private for $58 billion.

[Ryan Knudsen]

$58 billion. If that deal went through, it would be the biggest leveraged buyout of all time. It was so big that it made Jinju wonder.

[Jinju Lee]

You know, are they just like posturing just to try to get Kushtar to bid something higher or are they so averse to a foreign takeover that they are willing to put up that amount of money?

[Ryan Knudsen]

That's.

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[Jinju Lee]

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[Ryan Knudsen]

When a company goes private, it means it's taken off the stock market and shareholders get a big payout. But for 7 11, going private comes with a big debt. To take 711 private, its new owners would have to take on a lot of debt. Out of the $58 billion they're offering to pay, around two thirds of the money would come from loans. And that debt will have to be repaid by 7 11, meaning it might make it harder for the company to succeed. So why would they want to do it?

[Jinju Lee]

So, from the perspective of seven eleven's current management, they might be skeptical that a foreign company with zero experience in Japan could run the business successfully. So can a Canadian company really understand the nuances of Japanese consumer preference and how to run a convenience store in Japan? And then there's also a general reluctance to sell a company that's kind of so core to their culture and to their everyday lives. It's a matter of national pride almost.

[Ryan Knudsen]

This sort of thing doesn't just happen in Japan, of course. This year here in the U.S. the Biden administration opposed a deal for a Japanese company to buy U.S. steel. But historically, Japanese businesses have been much more skeptical of foreign acquisition offers, especially with a brand as beloved as 7 11.

[Jinju Lee]

Because if a foreign company can successfully buy Japan's largest convenience store chain, does that sort of open the door for other corporate crown jewels to get sold to the highest foreign bidder?

[Ryan Knudsen]

But this culture of protecting Japanese companies can sometimes result in bad business and poor returns for investors. And so in recent years, the Japanese government has tried to make some changes.

[Jinju Lee]

It really started with former Prime Minister Shinzo Abe in the early 2010s, and they introduced measures to try to make companies more shareholder friendly. They try to nudge companies to require more independent oversight of company executives to try to improve returns. Most recently, the largest stock exchange in Japan came out and said, hey, if your stock price gets too cheap, then you have to submit a plan to us outlining how you're going to increase your valuation.

[Ryan Knudsen]

Why would the stock exchange want that?

[Jinju Lee]

Well, you want more investors coming in, right? You don't want your stocks to be undervalued. It also contributes to, you know, a lot of Japanese citizens own shares in these companies. You would want their wealth to increase. They're trying to make the stocks that are listed on there more attractive so that they can attract more investment.

[Ryan Knudsen]

What happens to 711 will be a big indicator of how well these reforms are working. Right now, the ball is in Couche Tard's court. The company has to decide whether to increase its offer even more or drop the idea altogether. So what does all that say then? Like, given that background, the fact that Japanese companies tend to just sort of wave off takeover offers and that the government is trying to get bring about these changes, what does that say? Does that tell us anything about the fact that seven Eleven's parent company put in this private bid?

[Jinju Lee]

Well, I guess one way to read this buyout proposal is that Japanese companies really haven't changed that much like that they would rather do this risky, expensive deal to keep this crown jewel in their own hands. But actually, I think it's a good sign because a very bad sign would have been if 7 and I just kept rejecting the takeover proposal and didn't do anything about it. But the fact that they're offering this alternative counter bid is a sign that they feel pressure to act on behalf of shareholders.

[Ryan Knudsen]

So what do you think is going to happen next?

[Jinju Lee]

Well, we'll have to see what Couched comes back with. You know, There's, I guess, three potential scenarios. Either couchtard comes out with a stronger offer and 711 is sold to Couchtard, or management does its buyout and then the company goes private. And the third option is that they reject Couchehard, the management buyout doesn't go through and the company just says, okay, we're just going to continue on this path. We're not selling to anybody. But in that case, it may be hard to fend off disgruntled investors. The company would really have to prove that they can deliver superior returns.

[Ryan Knudsen]

That's all for today. Tuesday, November 19 the Journal is a co production of Spotify and the Wall Street Journal. Additional reporting in this episode by Megumi Fujikawa, Adriana Marqueze and Kosako Narioka. Thanks for listening. See you tomorrow.