Japanese retail group Seven & i Holdings is further expanding its global business. The 7-Eleven’s parent company acquires the US-gas station chain Speedway from Marathon Petroleum. The acquisition will add approximately 3,900 new stores to their more than 67,000 stores in 17 countries around the world. It is the largest acquisition in the company’s history, and will allow the retailer to diversify its presence in the United States, more so in the East Coast and Midwest. The $21 billion deal also includes a 15-years agreement in which Marathon would supply 7.7 billion gallons of petroleum each year to the chain’s gasoline stations.
Ryuichi Isaka, the Chief executive officer of Seven & i Holdings, said that the acquisition is a “historic first step” as the company seeks to become a global retailer. 7-Eleven is already the biggest retailer in the U.S. and Canada with about 9000 stores, but it plans to expand its outlets in the U.S. to further distance itself from its close competitor, Canada’s Alimentation Couche-Tard.
Seven & i Holdings abandoned their initial bid in March saying that the $22 billion was a price too high to pay. But Joe DePinto, president and CEO of 7-Eleven, continued pressing the parent company’s board members to OK the deal before it goes to a competitor. After all, the second largest convenience retailer in the U.S., Couche-Tard (operating the Circle-K brand), was also interested.
What is more, the U.S. convenience store market is mostly owned by single-store operators with the top ten retailers controlling only 20% of the market, according to AlixPartners, a U.S. consultancy firm. Such a fragmentation means that the number of convenience store chains with several thousand outlets is minimal and Seven & i could not afford to lose such an opportunity.
The New York Times reports that Marathon Petroleum has been struggling financially and had ended operations in two of its refineries. The company has been seeking to sell of Speedway and strengthen its financial position and reduce the pressure from investors. Marathon wanted up to $16.5 billion after-tax from the deal, much of which would go to servicing debts and paying investor’s dividends.
Why expand in the US now?
Seven & i Holdings has been looking to expand overseas due to saturation in its home market. The tight labour market in Japan makes the company’s 24-7 operating model challenging. “Japan’s convenience store market is at its limit as the population ages,” Hiroaki Watanabe, a logistics analyst and author of the book “If Convenience Stores Disappeared from Japan” told Japantimes.
Acquiring Speedway will also help 7-Eleven to expand to the gas station-based convenience store model as Speedway is 100% gas station-based. Only about 45% of the 7-Eleven stores in the U.S. have gas stations. According to LightStream Research analyst Oshadhi Kumarasiri as published on Smartkarma, the average revenue per store at 7-Eleven in the U.S. was around 28% below the industry average. “The acquisition of Speedway will help improve average revenue per store as gas stations-based stores generate about 2.25x higher revenue per store.”
7-Eleven made sales of about $17.6 billion in retail merchandise ($1.82m per store) last year and $18 billion in gasoline. Speedway, on the other hand, made a total merchandise sale of $6.3 billion ($1.62m per store) and $20.5 billion in gasoline sales. “We believe Seven & i’s extended product range could help Speedway to bridge the revenue per store gap”, Kumarasiri adds.
Furthermore, Speedway stores will give the retailer a bigger footprint in the East Coast and the Midwest and a presence in 47 out of 50 most populated cities in the U.S.
What does the future hold for Seven & i Holdings?
The acquisition comes at a time when there are uncertainties in both retail and gasoline markets caused by the coronavirus pandemic. For instance, there is an accelerating shift to online shopping. However, the combination of convenience stores and gas stations could be of benefit to Seven & i. But in the long run, the gasoline demand is also expected to decline as the world is looking for alternative fuel vehicles.
For share investors, the acquisition was discouraging at first with Seven & i shares falling 4.8% in Tokyo on August 3 following the announcement. This was the lowest level recorded since April 2013 and the biggest one-day drop this year since March 23. But already one day later the stock rebounded 8.9%, valuing the retailer’s push to aggressivly pursuing global growth.
On the debt market on the other hand, there are concerns since Moody’s Japan K.K. cut Seven & i Holdings credit rating to A2 from A1. The outlook on the ratings remains negative. However, the outlook on the company’s ratings had been negative prior to the announcement of the Speedway acquisition. This is based on “the struggle to maintain the profitability in its core domestic convenience store business as labor shortages have led to rising costs and discounts in franchise fees”, says Moody’s.
If Seven & i funds the transaction entirely with debt as expected, the company’s debt will increase by over 70%, while its earnings before interest, taxes, depreciation and amortization (EBITDA) will gain by only about 15%, according to Moody’s.