April 6, 2017

Texas Roll ‘Em Up

by Breakingviews.

The Japanese group behind 7-Eleven is stepping on the gas. Seven & i will pay $3.3 billion for most of Sunoco’s convenience stores and gas stations in Texas. The deal is a good geographic fit, cementing the buyer’s lead as America’s top corner-store chain. It also suggests the company has moved on from an extraordinary boardroom coup last year.

For the $36 billion acquirer, this fulfils a recent promise. After veteran boss Toshifumi Suzuki quit following a board rebellion over his controversial succession plans, new President Ryuichi Isaka said he wanted to buy and build his way to 10,000 stateside stores by 2020. As of February 2016, U.S. unit 7-Eleven had nearly 8,600; adding 1,108 more gets it nearly there.

The financial merits are hard to assess: Seven & i discloses financials only for a wider Sunoco unit, including stores and a gasoline-supply business it is not buying. But this will probably be greeted with relief by shareholders in the highly indebted seller. The so-called “master limited partnership” – a low-tax structure popular in the U.S. energy industry – has a market value of just $2.7 billion, and an enterprise value of $7.1 billion.

Another worrying sign is that the overall Sunoco business looks much less profitable than CST Brands, a rival which is being bought by Canada’s Alimentation Couche-Tard. Operating margins were just 1.3 percent last year, compared to CST’s 4.8 percent.

Still, considerable overlap in Texas and the eastern United States should help in cutting costs. Seven & i could also franchise most stores over time, as it does with its existing U.S. portfolio. The broader strategy looks appealing too: compared to Japan, the U.S. convenience-store market is far more fragmented, and economic growth will be far more robust. Seven & i is also adept at wringing far more cash out of each store – it targets $5,000 a day – by selling hot food.

A large acquisition like this is also a good way for Isaka to signal for business as usual. He owes his new position in part to support by U.S. activist Dan Loeb. Loeb had called for more drastic change than Isaka has delivered, including higher return on equity, bigger payouts to shareholders, a less flabby balance sheet, and selling off struggling businesses. It is not clear how big a stake, if any, Loeb now holds. But Isaka is at least showing some boldness.

 

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