Seven & I’s Effort to Raise Value in Focus at Quarterly Earnings

(Bloomberg) — Seven & i Holdings Co. Chief Executive Officer Ryuichi Isaka will make his first public appearance since Alimentation Couche-Tard Inc. approached the Japanese retailer with a buyout proposal, facing pressure to show that the business can command a higher valuation.
Apart from the numbers, investors will be watching for any news of potential sales of non-core assets designed to fend off the takeover approach that initially indicated a price of $14.86 a share. That values the company at ¥5.72 trillion ($38.6 billion), which Seven & i rejected as being too low to even enter negotiations.
News has been trickling out over the past week suggesting that the owner of 7-Eleven is ready to restructure its business, including the sale of retail operations including its original Ito-Yokado franchise and supermarkets, as well as part of its stake in Seven Bank Ltd. Any steps may also help counter any pessimism stemming from a projected drop in operating profit for the latest fiscal quarter.
“They may also need to revise their outlook for the year,” said Takahiro Kazahaya, an analyst at UBS AG Tokyo, citing headwinds for the US and Japanese convenience stores. “If they can’t increase the value of the company by themselves and Couche-Tard’s offer remains high, there’s a risk that they will face greater pressure to accept.”
Seven & i shares have climbed about 26% since the offer by the Canadian owner of Circle K stores became public, and are currently trading slightly above Couche-Tard’s indicated offer. The company is scheduled to report quarterly results and hold a post-results news conference Thursday, Oct. 10. 
A strong set of results would bolster management’s case for fending off Couche-Tard’s approach.
Analysts, however, project that Seven & i will report an operating profit of ¥143.5 billion for the three-month period through end-August, down 10% from a year earlier. Sales for the quarter are predicted to show a 5% rise to ¥3.04 trillion. For the full year, analysts are projecting, on average, for the company to report operating profit of ¥526 billion, below Seven & i’s own forecast for ¥545 billion. 
Profits for Seven & i’s overseas convenience-store business, which includes the Speedway franchise, shrank by 80% during the March-May quarter. That’s because it held back on raising prices as low-income shoppers cut back on spending due to rising inflation. 
Domestically, sales at convenience stores open at least one year have been declining as 7-Eleven dragged its feet on cutting costs in the face of greater competition from FamilyMart, Lawson and other rivals.
Seven & i has approached private equity funds and other entities for its Ito-Yokado stores and supermarkets, people familiar with the matter have said. Based on a multiple of six to eight times earnings before interest, taxes, depreciation and amortization, the sale could fetch ¥320 billion to ¥430 billion, one of the people said.
The sale of such retail assets, including part of the stake in Seven Bank, is part of a push to show a greater focus on the retailer’s convenience-store business. ValueAct Capital Management LP has argued in the past that the Japanese retailer should be worth more than it is now — ¥5.62 trillion — without a conglomerate discount.
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