Corporate Warfare: Couche-Tard vs Seven & i - Strategies and Stakes

Oct 28, 2024

4 min read

Recap

In a previous article we explored Alimentation Couche-Tard’s (Couche-Tard) proposed takeover bid of Seven & i Holdings (Seven & i).

It was established that the change to Japan's M&A guidelines made it easier for foreign companies to acquire Japanese companies, encouraging the consideration of bonafide offers at a boardroom level. This is a move away from senior executives' previous culture of decision-making in an informal context. The purpose is to ensure shareholders' interests are prioritised, as shareholders elect their boards to represent their interests.

Two potential issues surrounding this potential takeover were identified:

A potential board rejection, in which Couche-Tard could go directly to shareholders. We mentioned that Seven & i could defend itself using the ‘poison pill’ strategy, increasing the acquisition cost by issuing discounted shares.

Competition regulatory issues.

It is also important to acknowledge a third issue, culture.

New developments

Following the proposal, Seven & i considered ways to defend itself, including convincing the government to change its status from a ‘non-core’ to a ‘core’ rating under the Foreign Exchange and Foreign Trade Act (Fefta).

They did this by arguing that its stores play a vital role in Japan’s society, especially during earthquakes and natural disasters. This rating grants more protection over a takeover as it would require government approval.

Artisan Partners (Artisan) and Oasis Management (Oasis) publicly called for Seven & i to engage with Couche-Tard to maximise shareholder value. Artisan, a big investor, wrote a letter setting a deadline for Seven & i to update investors, as the offered price range and terms were unknown.

The special committee of independent board directors reviewed and rejected the proposal on three bases:

The bid ‘grossly undervalues’ the group, proposing $14.86 a share. They argue that this is “not in the best interest of . . . shareholders and other stakeholders”.

The bid would face US competition issues as mentioned in the previous article.

The role Seven & i’s stores play in Japan’s society, e.g. providing supplies and basic services in an earthquake or natural disaster.

Seven & i has further bolstered its defences by appointing Nomura, Japan’s biggest investment bank, as its advisor ‘for a potential takeover battle’ according to the FT.

Couche Tarde's response to Seven & i’s concerns

Bid price

Couche-Tard are “highly confident” that they have “sufficient capacity to finance the transaction in cash”. They are willing to increase its offering by raising cash through divestitures. This would also satisfy regulatory issues, knocking two birds with one stone.

Competition issues

As mentioned, Couche-Tard has said that competition concerns could be satisfied through asset divestitures.

Role in Japan's society

Couche-Tard has acknowledged that Seven & i plays “an important role in Japan’s emergency response” and said it was committed to “continuing to serve in this capacity”.

Ways to Defend Against a Hostile Takeover

Considering this, let us explore ways a company can defend itself against a potentially hostile takeover:

Poison Pill Defence: diluting shares which increases the cost of acquiring shares. There are two versions:

a. The Flip-In Pill – involves issuing preferred shares at a discounted price that only existing shareholders can buy, whilst excluding the acquirer, reducing control they have or could gain.

b. The Flip-Over Pill – involves diluting the hostile bidder’s stake in the acquiring company by allowing the target company’s shareholders to buy shares in the acquirer at a discounted price.

Staggered Board Defence (Staggered Board Defence) – a company separates its board of directors into groups that are put up for re-election at different meetings. This makes it time-consuming for the entire board to be voted out.

Crown Jewel Defense – deliberately selling off valuable assets/branches of business. This tends to be a last resort defence as the company intentionally sabotages itself. The crown jewels tend to be sold to a friendly third company (a white knight).

White Knight Defence – seeking a friendly buyer to acquire the company or key assets, making the business less attractive to the hostile bidder. The ‘friendly’ acquirer often restructures and finds a place for senior management and possibly places several members on the board.

Greenmail Defence – repurchasing shares from hostile parties at a premium. However, some companies have anti-greenmail provisions in their corporate charters. Mainly to protect shareholders from the board using company cash and paying too much for stock simply to save management.

Differential Voting Rights Shares – issuing shares similar to ordinary shares but with fewer voting rights. Because of this, they tend to trade at a discount or pay a higher dividend. It allows hostile bidders to buy shares but not gain control due to fewer votes per share.

Employee Stock Ownership Plan – a common benefit offered to staff as part of a firms retirement plan package. They offer a tax saving to both the company and its shareholders. The risk is that the employee's votes are not controlled by the company, but the idea is that the more of the company owned by the staff, the more votes in favor of the board and management.

Golden Parachute Defence – large severance packages given to executives after a merger or acquisition. This can be in the form of cash bonuses, severance pays or share options. When companies acquire another, they tend to replace the management, sothis would be a huge blow to the company's finances. However, this defence may harm shareholders.