Japan’s FamilyMart plays way too easy to get

The $38bln energy-to-mining giant wants to take the ubiquitous seller of onigiri and soft drinks private, citing a “harshly competitive” industry

  
The signboard of a joint FamilyMart/Don Quijote convenience store is pictured in Tachikawa, Tokyo, Japan June 1, 2018.

The signboard of a joint FamilyMart/Don Quijote convenience store is pictured in Tachikawa, Tokyo, Japan June 1, 2018.

Reuters/Sam Nussey

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

HONG KONG - A convenience-store takeover doesn't check out. Japanese trading house Itochu, which already owns just over 50% of FamilyMart, wants to buy the rest of the convenience-store chain in a $5.4 billion deal. The premium is thin, and governance concerns should give investors pause.

The $38 billion energy-to-mining giant wants to take the ubiquitous seller of onigiri and soft drinks private, citing a “harshly competitive” industry. Itochu’s offer of 2,300 yen ($21.54) a share represents a 31% premium to FamilyMart’s July 8 closing price, but is equivalent to where it traded in March. The offer is also lower than the special committee’s financial adviser valuation, which estimated a fair discounted cashflow value of between 2,472 yen and 3,040 yen per share excluding synergies. It is also below the amount Itochu paid when it upped its stake in 2018.

The tender offer documents, riddled with amendments, also raise red flags. Japan's Ministry of Economy, Trade and Industry revised its M&A guidelines last year, which call for special committees to be established to assess the fairness of procedures and for buyers to receive support from a “majority of the minority” shareholder group, among other ideas. Unfortunately the special committee and target board have treated them as suggestions.

For instance, FamilyMart's special committee wanted Itochu to buy a majority of the minority-held shares, which would have taken its overall stake in the target to roughly 75%. But Itochu only wanted to set the minimum acceptance threshold for the tender offer at 9.9% to bring its total shareholding up to 60%. In the end, FamilyMart’s board endorsed the offer, but stopped short of actively recommending minority owners accept it because of the low price.

Itochu could help FamilyMart fend off competitors like Lawson and Seven & I, at a time when performance is flagging, but it can do that without taking it private. Improving its value is in Itochu’s financial interest whether the deal goes through or not, and it says it plans to implement changes regardless. FamilyMart shares are already trading at the level of the offer. There’s no reason for stakeholders to let themselves get squeezed out by this lowball price.

CONTEXT NEWS

- Japanese trading house Itochu, which owns a 50.1% stake in FamilyMart on July 8 announced that it planned to acquire the rest of convenience store chain at 2,300 yen per share, a 31% premium to FamilyMart’s closing price on July 8. It also plans to delist the company if the bid is successful.

- At 2,300 yen a share, the tender offer would value FamilyMart’s equity at roughly $11 billion.

- FamilyMart announced it had adopted a resolution at the meeting of its board of directors on July 8 supporting the tender offer, saying it would leave the decision of whether to tender shares to shareholders.

- The tender offer runs from July 9 until August 24.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Pete Sweeney and Jamie Lo) ((sharon.lam@thomsonreuters.com; Reuters Messaging: sharon.lam.thomsonreuters.com@reuters.net))


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