Artisan Partners International Value Team Sends Letter to the Board of Seven & i

MILWAUKEE, Aug. 30, 2024 (GLOBE NEWSWIRE) -- The Artisan Partners International Value Team today sent a letter to the Board of Directors of Seven & i. The full text of the letter is as follows:

30 August 2024

The Board of Directors
Seven & i Holdings Co. Ltd.
8-8, Nibancho, Chiyoda-ku
Tokyo 102-8452, Japan

Dear Members of the Board:

We represent Artisan Partners International Value Strategy, a U.S. dollar (“USD”) 44 billion long-term value investing platform whose discretionary investment clients currently own over 1% of the outstanding shares of Seven & i Holdings (“SIH”). We have been shareholders of SIH since July 2019. As a signatory to Japan’s Stewardship Code, we are committed to promoting sustainable growth of companies through investment and dialogue.

The media reported on 19 August 2024 that SIH received an acquisition proposal by Alimentation Couche-Tard (“ACT”). In the SIH press release from the same date, the company stated: “Neither the Board of Directors nor the Special Committee has made any determination at this time to either accept or reject the proposal from ACT, to enter into discussions with ACT or to pursue any alternative transaction.” It is imperative that the board of directors negotiate with ACT immediately to achieve the best possible outcome for shareholders. The board of directors has several items to consider under the updated Japanese Ministry of Economy, Trade and Industry (“METI”) Guidelines for Corporate Takeovers and global corporate governance best practices. Based on METI’s new M&A guidelines, the board’s independent evaluation of the offer must give appropriate weight to the offer price as a factor in its assessment of whether the transaction enhances the target’s enterprise value. We encourage you to read the document in its entirety, but you should pay close attention to the following points:

“Realizing synergies through acquisitions and improving inefficient management are among the important ways for management to bring the corporate value closer to, or to increase, the company’s intrinsic value.”

“The target company management should not make the concept of corporate value unclear by emphasizing qualitative value, which is difficult to measure, nor should the ‘corporate value’ concept be used as a tool for management to defend themselves (including management referring to retention of employees as an excuse to defend themselves).”

“Therefore, while the transaction terms themselves such as the price should have a certain range, especially when the board of directors decides on a direction toward reaching agreement of an acquisition (including where the board of directors is actively seeking acquisition proposals; this inclusion also applicable hereinafter), the target company directors should act in the interest of the company and its shareholders. In other words, a reasonable effort should be made to ensure that the acquisition will be based on terms that will secure the interest which shareholders should enjoy, in addition to determining whether the acquisition is appropriate from the perspective of enhancing the company’s corporate value.”

“In addition, it is advisable for the board of directors to thoroughly compare, from a quantitative perspective, the differences between the purchase price and measures to enhance corporate value through acquisitions proposed by the acquirer, and the measures to enhance corporate value if the incumbent management team were to continue to manage the company.

Furthermore, the board of directors should act in a manner that allows it to be responsible for explaining (afterward) the rationale behind its reactions to acquisition proposals and their decisions on whether to accept acquisition proposals. Often, the proposed purchase price can be higher than the immediately preceding stock price (which is formed on the basis of the market’s evaluation of the incumbent management team and its management strategy).”

Regarding the final point above, the undisturbed share price of SIH was nearly at the same level as it was in 2016 when many of the current executive directors were in place. In USD terms, the currency in which the lion’s share of the company’s capital has been deployed, the results are worse. Since 26 May 2022, the day on which most of the current independent directors were elected, the company’s share price has underperformed the Nikkei 225 and TOPIX by more than 40%.

We did not arrive at this juncture because corporate oversight and capital allocation at SIH were best in class. To the contrary, management has deferred opportunities to enhance corporate value on several occasions. As an example, Sogo & Seibu was sold below fair market value and the decision to sell or spin off Ito-Yokado took years. SIH deployed more than USD 25 billion in acquisitions, net of divestitures, since 2016, while its market capitalization declined in USD prior to the takeover announcement. To put the acquisition spending in perspective, that is nearly enough capital to buy back the entire company at its undisturbed market capitalization of USD 31 billion before the ACT offer came to light.

ACT is uniquely positioned to enhance SIH’s corporate value. ACT acquired Circle K in 2004 and expanded the brand across the U.S. and globally. 7-Eleven has tremendous brand power that could be leveraged on a global basis. Unlike SIH, ACT’s overseas expansion track record is excellent. Since ACT’s fiscal year end in 2016, it deployed nearly USD 12 billion of capital into acquisitions, net of divestitures. ACT’s market value increased by USD 34 billion over the same time period, delivering a 187% total shareholder return (“TSR”) before the takeover announcement.

Negotiating with ACT is the best tactic to preserve positive stakeholder outcomes in Japan. In an effort to maximize shareholder and stakeholder value, we encourage you to solicit offers for the company’s Japanese subsidiaries as quickly as possible. Failure to engage with ACT and other potential partners could result in a less favorable outcome with less flexibility.

The government laid the foundation over the past decade in preparation for this moment, and the progress across corporate Japan has been tremendous. Government intervention would signal Japan Inc. is not prepared to stand behind these relatively new, yet globally competitive measures to improve asset efficiency. It would be unfortunate for the Japanese economy and capital markets to discredit so much of what recently pushed the Japanese equity markets to an all-time high.

On 27 August 2024, the media reported there is an immediate effort underway to alter the company’s status under the Foreign Exchange and Foreign Trade Act (“FEFTA”). These rumors, along with the lack of official communication from the company, are troubling. 7-Eleven was originally an American business. It was only in the early 1990’s that Ito-Yokado seized on the managerial missteps of Texas-based Southland Corporation and acquired a controlling stake. Changing the company’s FEFTA status to “core” after a takeover offer has been made is like changing the rules halfway through the game. Shareholders deserve a fair and independent process.

Since our initial engagement with the company in 2019, we have provided several recommendations in our letters and presentations to the board of directors and management to enhance both the corporate governance and the enterprise value of SIH. It is unfortunate the urgency of the situation was not internalized. Management has not reacted quickly enough to the issues facing this company for nearly a decade. Speed is critical if the company is going to achieve its goal “to become a world-class retail group.”

We request the company brief shareholders on the status of the takeover negotiations by 19 September 2024, one month from the initial media release. The outcome of this process has potentially historic implications. Management and the board of directors will be held accountable by shareholders. Given the company’s poor track record of value creation, we encourage you to take this opportunity to prioritize shareholders.

Sincerely,