Couche-Tard’s Acquisition of Seven & i Faces Japanese Government Pre-Approval Amid Security Concerns

Canadian convenience store giant Alimentation Couche-Tard is required to seek pre-approval from Japanese authorities before finalizing its proposed acquisition of Seven & i Holdings. The approval is necessary due to Japan's stringent foreign exchange law aimed at safeguarding national security in sensitive industries.

Couche-Tard’s Bid for Seven & i Triggers Japan's Strict Foreign Investment Scrutiny Over Security Concerns

Nikkei has learned that Alimentation Couche-Tard, the Canadian convenience store leader, is anticipated to require prior sanction from Japanese authorities to finalize its proposed acquisition of Seven & i Holdings, which is engaged in potentially sensitive industries.

In 2020, Japan's foreign exchange law was amended to require overseas investors to undergo a prescreening process before investing in companies in sectors such as defense, nuclear power, oil and gas, pharmaceuticals, and cybersecurity.

The objective is to prevent the military from utilizing critical technologies or disrupting the supply of products with no substitutes. The law does not apply to food processing, culinary service, or retail.

According to Japan's Finance Ministry, Seven & i's extensive group portfolio is still subject to the prescreening requirement, even though the company is most renowned for its retail operations, which include its 7-Eleven convenience stores.

The articles of incorporation of Seven & i list a diverse array of business activities, including banking, petroleum sales, and security services, and the company counts approximately 180 group entities. The foreign exchange law targets a variety of sectors, including security services.

This implies that Couche-Tard must obtain pre-approval from the Japanese government to acquire a stake of 1% or more in Seven & i, even if the two companies consent. Failure to comply with this requirement may result in imprisonment and penalties.

The inspection will exclusively concentrate on the operations of Seven & i subject to the foreign exchange law. If Japanese authorities determine that the agreement threatens economic security, they may either modify the terms or prevent it from being implemented.

Couche-Tard’s Acquisition Challenges Echo Past Failures as Global Regulatory Scrutiny Intensifies

In 2021, Couche-Tard encountered obstacles in its pursuit of acquiring Carrefour, which resulted in opposition from the French government due to the potential economic consequences of the transaction.

Couche-Tard suggested that Carrefour be listed in France and Canada and that further investment be made in Carrefour storefronts to alleviate concerns. However, the acquisition was ultimately doomed by the French government's persistent opposition to it on the grounds of food security.

Compared to the world's largest retailer, Walmart, and Couche-Tard, Seven & i's return on equity and other metrics are subpar. Investors have attributed this to the conglomerate discount, a phenomenon in which a company with numerous businesses is valued at a lower level than the aggregate of its parts.

In 2023, ValueAct Capital, a U.S. hedge fund, submitted a shareholder proposal to Seven & i, imploring the company to separate and spin off its convenience store and supermarket businesses. The hedge fund argued that the current status quo was causing confusion and disappointment among stakeholders. The conglomerate structure that has pressured Seven & i's stock price may now impede its acquisition.

Countries are enhancing regulations from an economic security perspective as cross-border mergers and acquisitions expand globally. Some politicians in the United States oppose Nippon Steel's proposed acquisition of U.S. Steel on these grounds.

Japan is broadening the scope of industries subject to foreign exchange law. This month, semiconductor manufacturing equipment, advanced electronic parts, and multifunction printers were added to the list of essential industries subject to prescreening.