--:-- Ryan Knudsen: Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Tuesday, November 19th.
--:-- [Sound of a Slurpee being opened]
--:-- Ryan Knudsen: Yesterday, I popped into a 7-Eleven by the office. It's definitely a normal 7-Eleven, lots of soda and stuff you'd expect. But then you got these taquitos or something, crunchy with cheese or chicken inside. And then you got your Big Gulp options. My gosh, the Big Gulp is so big.
--:-- Ryan Knudsen: I decided to pick up a classic Slurpee. I went with Coke flavored. There's some cherry mixed in there as well. Wow, it's really sugary. And I mean, it tastes good. I'm not going to lie. But I don't think I could have more than one of these a decade, honestly.
--:-- Ryan Knudsen: But I wasn't at 7-Eleven for culinary reasons. I was there for journalism. Because right now, 7-Eleven 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 7-Eleven is playing hard to get.
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--:-- Jinju Lee: 7-Eleven 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 7-Eleven even more than Americans do. Japan.
--:-- Ryan Knudsen: If you could describe 7-Eleven and Japan in one word, what would it be? Hmm, I don't know if magical is quite the word. Exciting, maybe?
--:-- Jinju Lee: Even though 7-Eleven started in the U.S., it's been a Japanese company since the early 1990s. And Japan has more 7-Elevens than anywhere else in the world. It's a brand that people really trust, and it's a place that people regularly frequent. You know, for lunch, dinner, breakfast.
--:-- Jinju Lee: If you go on YouTube and search for 7 Japan, you see so many raving reviews. You guys, 7-Elevens 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 falafel. 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.
--:-- Jinju Lee: No offense to the hot dog, but food at Japanese 7-Elevens is much better. 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 the thinnest layer of potato skin possible so that they could really enhance the flavor.
--:-- Ryan Knudsen: So yeah, 7-Eleven is a brand that's really loved by Japanese people. They really trust the quality of what 7-Eleven sells. And that brand love and great food is one of the reasons another company is trying to buy 7-Eleven. That company is a Canadian one, another convenience store giant called Alimentacion Couche-Tard.
--:-- Ryan Knudsen: In the U.S., Couche-Tard owns the convenience store chain Circle K, which is the second biggest chain in the U.S. behind 7-Eleven. 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. It's just better margins.
--:-- Ryan Knudsen: For Couche-Tard, this is where 7-Eleven would come in, specifically Japanese 7-Eleven. So Couche-Tard wants to improve their food offerings. 7-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: Couche-Tard buying 7-Eleven would be a massive merger, and it would allow Couche-Tard to dramatically increase its market share. 7-Eleven has more than 80,000 stores worldwide. So with this one move, Couche-Tard would become five times bigger than it is today.
--:-- Ryan Knudsen: Couche-Tard began its pursuit of 7-Eleven in August, when it made an offer to 7-Eleven's parent company, a company called 7&I. Couche-Tard approaches 7-Eleven first in August, and they offer about $39 billion. dollars. And Seven and I rejected that offer and basically said, and this is in their words, they said the price was grossly undervaluing the company.
--:-- Ryan Knudsen: And they also said there would be multiple regulatory barriers, particularly in the U.S. Isn't like regulators aren't going to let these two giants, number one and number two, combine in the U.S.? Yes, exactly.
--:-- Ryan Knudsen: When 7-Eleven turned them down, Couche-Tard came back and sweetened the deal by $8 billion. upping their offer to $47 billion. 7&I is a publicly traded company, and Couche-Tard's new offer excited some of its investors.
--:-- Ryan Knudsen: If you're a shareholder of 7&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 stock even more. Seven and I didn't respond publicly to the second Couche-Tard offer.
--:-- Ryan Knudsen: 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 7-Eleven in Japanese hands. They came up with an offer to take the company private for $58 billion. $58 billion.
--:-- Ryan Knudsen: If that deal went through, it would be the biggest leveraged buyout of all time. It was so big that it made Jinju wonder. You know, are they just like posturing just to try to get Couche-Tard 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 next. Tuesday on NBC, Jimmy Fallon and Bozema St. John host a highly anticipated new competition show. I hire 10 creatives from all walks of life. They will be battling it out to see who can impress the world's biggest brands. This is a huge opportunity. This is the battle for the next big idea. This is not play play. We're spending millions of dollars. I'm so excited to embark on this adventure with all of you. Make the best idea win! On Brand with Jimmy Fallon. Series premiere Tuesday on NBC.
--:-- Ryan Knudsen: This episode is brought to you by State Farm. Checking off the boxes on your to-do list is a great feeling. And when it comes to checking off coverage, a State Farm agent can help you choose an option that's right for you. Whether you prefer talking in person, on the phone, or using the award-winning app, it's nice knowing you have help finding coverage that best fits your needs. Like a good neighbor, State Farm is there.
--:-- 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-Eleven, going private comes with a big downside. Debt. To take 7-Eleven 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.
--:-- Ryan Knudsen: And that debt will have to be repaid by 7-Eleven, meaning it might make it harder for the company to succeed. So why would they want to do it? So from the perspective of 7-Eleven's current management, they might be skeptical that a foreign company with zero experience in Japan could run the business successfully.
--:-- Ryan Knudsen: 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-Eleven.
--:-- Ryan Knudsen: 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? But this culture of protecting Japanese companies can sometimes result in bad business and poor returns for investors.
--:-- Ryan Knudsen: And so in recent years, the Japanese government has tried to make some changes. 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 like nudge companies to require like more independent oversight of company executives to try to improve returns.
--:-- Ryan Knudsen: 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. So why would the stock exchange want that? Well, you want more investors coming in, right? You don't want your stocks to be undervalued.
--:-- Ryan Knudsen: 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 7-Eleven 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.
--:-- Ryan Knudsen: 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 bring about these changes, What does that say? Does that tell us anything about the fact that 7-Eleven's parent company put in this private bid?
--:-- Ryan Knudsen: Well, I guess one way to read this buyout proposal is that Japanese companies really haven't changed that much. You know, 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 Seven and I just kept rejecting the takeover proposal and didn't do anything about it.
--:-- Ryan Knudsen: But the fact that they're offering this alternative counter bid is a sign that they feel pressure to act on behalf of shareholders. So what do you think is going to happen next? Well, we'll have to see what Couche-Tard comes back with.
--:-- Ryan Knudsen: You know, there's, I guess, three potential scenarios. Either Couche-Tard comes out with a stronger offer and 7-Eleven is sold to Couche-Tard. Or management does its buyout and then the company goes private. And the third option is that they reject Couche-Tard. The management buyout doesn't go through. And the company just says, OK, we're just going to continue on this path. We're not selling to anybody.
--:-- Ryan Knudsen: 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. 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 Marchese, and Kosako Narioka. Thanks for listening. See you tomorrow.
