Analysis: Couche-Tard, 7-Eleven Encounter Early Snag in Store Divestiture Plan

By Abigail Summerville and Anton Bridge

NEW YORK/TOKYO (GudangMovies21) – The convenience store behemoths Couche-Tardy and Seven & i are navigating the initial challenges of their strategy to sell off several thousand stores they jointly control in North America to address antitrust worries before potentially merging. Their first hurdle will be enticing competing buyers for these outlets.

It’s probable that the two convenience store operators will find it challenging to attract bids from other similar retail chains due to concerns about possible antitrust issues associated with such a transaction. This assessment comes from sources close to the situation as well as multiple antitrust specialists. Seven & i operates the 7-Eleven franchise, boasting over 12,000 outlets across the United States.

Up until now, the majority of prospective purchasers for the outlets have been private equity companies, according to these sources. This poses a possible challenge for both Canada’s Couche-Tard and Japan’s Seven & i, since US antitrust authorities generally disapprove of private equity firms acquiring divested stores; such firms usually do not intend to hold onto them long term.

The U.S. Federal Trade Commission typically does not consider investment firms ideal buyers for divested stores, the specialists noted, because their focus leans towards achieving quick profits, which aligns with the private equity industry’s approach.

Michio Suzuki, an antitrust partner at Baker McKenzie in Tokyo, stated, “The agency is likely to favor a strategic buyer.” He added, “In their opinion, the entity acquiring these assets must be robust enough to manage the sold-off outlets as a sustainable and competitive business segment.”

The divestment bundle suggested by the firms includes over 2,000 U.S. outlets. Nevertheless, according to experts, there is no prior instance of private equity taking control of convenience stores separated during a major consolidation process.

Financial buyers have acquired divested grocery and dollar stores from larger retail mergers, yet their success in managing these businesses has been inconsistent.

When Dollar Tree purchased Family Dollar in 2015 for approximately $9 billion, the Federal Trade Commission required the merging parties to offload several hundred outlets. Dollar Tree chose investment company Sycamore Partners to acquire 330 stores, yet after two years, Sycamore transferred these stores to Dollar General since they were unable to maintain them as an independent profitable venture.

Sources close to both Couche-Tard and Seven & i contend that these companies' divesture bundle includes a robust collection of competing stores across numerous states, which could be managed effectively by a private equity firm.

So far, these businesses have garnered initial interest from buyout firms eager to look into the possibility of acquiring expanded convenience store chains with a national presence, as reported by five sources. Nonetheless, several of these firms remain hesitant about placing bids for an asset emerging from a merger that isn’t nearly finalized, stated three sources.

KROGER-ALBERTSONS FALLOUT

Big-box store consolidations have encountered increasing obstacles from competition watchdogs globally over the past few years.

The fallout from a recent unsuccessful mega deal in the U.S. grocery sector compelled Couche-Tard and Seven & i to adopt an unconventional approach by initially downsizing their prospective joint enterprise in North America prior to engaging in merger discussions.

Seven & I is eager to prevent a recurrence of what they have called "the failed saga of Kroger/Albertsons." The company has already been issued a notification from the FTC indicating a possible probe into a potential merger with Couche-Tard, which is uncommon prior to officially signing any agreement.

The announcement of the merger between Kroger and Albertsons came in 2022, yet numerous attempts to persuade U.S. antitrust regulators—such as suggesting a $2.9 billion sale of 579 outlets to C&S Wholesale Grocers—to approve the deal did not succeed. The FTC deemed C&S an unsuitable purchaser and characterized the bundle of assets for disposal as a "random collection of unrelated stores."

"Every target in a major retail-chain merger will certainly pay close attention and proceed with caution afterward," stated Alex Livshits, who is a partner at the law firm Fried Frank.

Fearing a similar outcome, the owner of the 7-Eleven convenience store chain has rejected Couche-Tard's acquisition efforts since August. The company had earlier pointed out that the grocery giants’ choice to abandon their $25 billion merger in December due to substantial regulatory opposition serves as a warning against retail consolidations.

Seven & I ultimately suggested starting collaborative regulatory efforts sooner rather than later to address possible antitrust issues, an idea to which Couche-Tard consented in the past few weeks.

Seven & I operates as the leading chain of U.S. convenience stores, boasting around 12,650 locations, whereas Couche-Tard ranks second with approximately 7,100 outlets. If these two companies were to merge, their combined entity would be nearly seven times larger than Casey's, which stands as the third-largest player in this market.

"There’s danger in entering into an entirely sealed-off divestiture to a third party that’s legally binding,” stated Kathy O’Neill, a partner at Fried Frank and a previous member of the Department of Justice’s antitrust division.

She mentioned that the risk lies in the agency not approving the buyer you have chosen or insisting on seeing additional asset disposals or store closures.

Firms typically pursue regulatory approval once they have signed agreements.

A few analysts suggested that the failure of the Kroger-Albertsons merger could serve as a potential blueprint for achieving regulatory approval in subsequent retail consolidations, offering insights into strategies to avoid. Additionally, they noted that the early strategy employed by Couche-Tard and Seven & i provides them with extra time to gradually convince regulators about the merits of their proposed union.

(Reported by Abigail Summerville in New York and Anton Bridge in Tokyo; Additional reporting by Rocky Swift in Tokyo; Edited by Anirban Sen, Edwina Gibbs, and Matthew Lewis)