In March, Seven & i balked at paying $22bn for Speedway, a US gas station chain. During the next five months, consumer spending crashed and demand for petrol there collapsed by as much as half. Now Seven & i is sealing the deal with vendor Marathon Petroleum for just 4.5 per cent less. However adept it is at selling coffee, magazines and umbrellas, it is not the world’s toughest negotiator.
Japanese outbound M&A, underpinned by cheap money and a shrinking domestic population, is one of the few certainties in an uncertain world. This is just the latest deal in a post-bubble spree spanning food, pharma and finance: think Daiichi-Sankyo and Ranbaxy, Kirin and Schincariol and Toshiba and Westinghouse.
Few will have a happy ending. Bain calculates that around a quarter of sizeable Japanese outbound deals in the two decades or so to 2014 ended in write-offs, compared with just around 5-6 per cent for US deals.
The $21bn price tag excludes debt. To make the numbers stack up on this one, Seven & i targets savings of $475m to $575m a year, starting from year three. Taxed and capitalised at the midpoint, that comes to $3.5bn. Seven & i adds in $5bn from sale and leasebacks — Speedy owns nearly three-quarters of its real estate — and a $3bn US tax benefit.
Still, the price — fittingly, given the cost of a snack at the average gas station — looks rich. The 3,900 outlets produced ebitda of $1.5bn last year, implying a trailing multiple of 14 times. That is roughly twice the estimated multiple for similar businesses. It is also a cut above the implied valuation when Seven & i acquired similar parts of Sunoco’s business for $3.3bn in 2017.
The purchase will catapult the group’s modest debt to ebitda ratio of about 1.5 times up to around 4 times, which the group plans to bring back below three times within two years. Unimpressed investors rightly sent the share price lower on Monday. Marathon’s deal makers came out top in this negotiation.
This article has been amended to include debt detail
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