The Long and Short
7-Eleven and Couche-Tard merger saga continues
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Canadian Circle-K owner Alimentation Couche-Tard (ATDBCN: Baa1/BBB+) and 7-Eleven’s (SVELEV: Baa2/A*-) Japanese parent company, Seven & I Holdings, have been tied up in merger speculation since ATDBCN first made its approach in August last year. The two parties are reported to once again be in friendly negotiations in recent weeks. This comes after SVELEV’s defensive attempt to take itself private via management led buyout failed to garner support and funding.
More recently, ATDBCN converted its existing $47 billion offer to yen denomination (amount undisclosed) at the request of SVELEV. Now the two parties appear to be shifting attention to the prospect of asset sales in the US to potentially help clear regulatory hurdles. As deal prospects are once again picking up, investors can start to make more projections as to how a combined company might be capitalized. At current valuations, the downside scenarios of these projections appear to be largely priced in. This leaves some potential upside for investors should the deal fall through (quite possible) or ATDBCN executes a more bondholder friendly outcome than spreads currently indicate.
Relative to the investment grade retailer peer group, ATDBCN and SVELEV bond spreads appear to be trading closer in-line with lower-rated BBB peers, reflecting investors’ concerns about the possible funding of a merger between the two convenience store giants (exhibit 1).
Exhibit 1: SVELEV and ATDBCN credit curves closely in-line; trading wide of peer group
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications
S&P recently placed the A rating of SVELEV on watch negative following management’s announcement to pursue a massive share buyback program over the next several years and consider a spin-off of its US operations, even as it re-engaged with talks with ATDBCN. Moody’s also placed the parent company on review for downgrade but left the Baa2 debt rating unchanged. It is worth highlighting that while SVELEV receives significant support from Seven & I Holdings, the holding company does not explicitly guarantee any 7-Eleven debt obligations besides the commercial paper program.
S&P also recently commented on ATDBCN, stating that if-and-when an official revised offer is accepted, they will likely be placing the ratings on watch negative as well. The rating agency commented that with a potential enterprise value of as much as $60 billion, the deal could see leverage jump from a downside projection of adjusted 3x leverage to well over 5x leverage, in an all-debt funding scenario. For the record, ATDBCN appears to be leaning toward a split cash/stock funding package for the merger if a deal can be made, and both parties are pressing for asset sales in the US. Given the recent failure of the Kroger/Albertson’s deal, it appears some appeasement will almost certainly be necessary.
However, taking a similar “worst case scenario” approach, exhibit 2 demonstrates how an all-cash, debt-funded deal for SVELEV at current valuations would potentially impact pro forma leverage. The exhibit uses public financials for Seven & I Holdings Co. Ltd, which has a current enterprise value of just over USD $55 billion. That would assume all-cash consideration of a little under $38 billion, plus the assumption of $26 billion in debt, net of just under $10 billion in cash and equivalents on balance sheet. That also assumes no asset sales from overlap US operations, which could be considerable, and provide additional consideration for potential debt reduction.
While this is a very rough estimation for the proposed transaction of SVELEV, it does demonstrate that even under similar “worst case” conditions, that gross leverage would only temporarily jump to around 6x, while net leverage would increase to only about 5x from 2.5x and 2.2x, respectively. From there it is easy to see how a path toward solid investment grade ratings is possible, especially given the huge, combined cash flow available for debt reduction from the two entities. Meanwhile, equity funding and asset sales would provide a lot of additional cushion to pro forma credit metrics if the deal is ever able to come to fruition.
Exhibit 2: Combining the companies
Source: Santander US Capital Markets LLC, Bloomberg LP, Company Financials
Deal history: In August of 2024, ATDBCN approached Seven & I Holdings about a potential takeover (initially around $31 billion). Several proposals were made with higher prices and subsequently rejected by Seven & I, citing that the offer prices were insufficient. Seven and I also announced plans to spin off its non-core businesses into a new holding company to unlock shareholder value, in a defensive move to fend off the approach from ATDBCN.
ATDBCN continued its pursuit of the 7-Eleven owner, hoping to entice shareholders to consider a buyout of the complete operations. Eventually, Seven & I Holdings announced that it was considering a management buyout to take itself private with the support of the founding Ito family in a transaction that could be worth around $58 billion (at the time). With funding from banks and a restructuring of its large debt footprint, management believed that a public-to-private transaction could help navigate a path forward without worrying about the short-term fluctuations in share price. At one point, Seven & I also stated that the buyout could also include a three-way split of the company, including an IPO of its North American operations to maximize value. More recently, Seven & I abandoned those pursuits and appears to have returned to the negotiating table, but not before publicly suggesting a massive share buyback program to be executed over the next couple of years along with a potential spin-off of its US operations.
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