Seven & i Holdings, owner of 7-Eleven, will acquire leading convenience store and gas station chain Speedway from the current owner, Marathon Petroleum, for $21bn, 5 months after the Japanese retail giant stopped talks amidst the coronavirus pandemic. This deal, being the biggest acquisition by Seven & i and one of the largest globally since the onset of the pandemic, is a move to increase presence in the US beyond their shrinking Japanese home market. However, acquiring a business that primarily relies on fuel to generate revenue is seen as a controversial move with the current uncertainty revolving around the oil industry, with Royal Dutch Shell CEO, Ben van Beurden, expressing doubts that oil demand will ever return to pre-COVID levels.
Seven & i Holdings Co. Ltd (all details correct as of 11th August)
Industry: Retail – consumer staples
CEO: Ryuichi Isaka
HQ: Tokyo, Japan
Market Cap: $27.81bn
Enterprise Value: $27.71bn
P/E ratio (ttm): 16.32
Fiscal year 2020 revenues: ¥6,644bn ($60.94bn)
Fiscal year 2020 net income: ¥218bn ($2.00bn)
Industry: Retail – fuel and consumer staples
CEO: Timothy T. Griffith
HQ: Enon, Ohio, United States
On 3rd August, Seven & i Holdings confirmed its acquisition of Speedway for $21bn, $1bn lower than the price at which the deal fell through between the two companies back in March. Marathon Petroleum has confirmed that this all-cash deal has been approved by both company boards and is set to be complete by the first quarter of 2021. Despite this deal helping Seven & i expand its outreach in the US market, it didn’t seem to go down well with investors due to concerns regarding the acquisition price, which implies Speedway’s enterprise value to be 13.7 times its earnings before interest tax, depreciation and amortisation (EBITDA). These investor fears caused Seven & i’s shares to drop nearly 9% upon the acquisition’s announcement, eventually closing 5.6% down on the day.
7-Eleven cementing their position in the US market
Seven & i, who suffered heavy pandemic-induced losses as net profits fell by 73% for the quarter ending in May, now looks to further expand its outreach beyond Japan, where its stores face challenges of tough price competition, a shrinking population, and slow economic growth. This deal is aimed to strengthen their position in the US convenience store market, following on from the 2017 acquisition of parts of Sunoco’s convenience store and petrol station business for $3.3bn. The minimal geographical overlap of the two companies’ store locations means that the addition of Speedway’s 3,900 stores to Seven & i’s existing 9,800 in the US will increase its regional exposure. Indeed, Seven & i will now be available in 47 out of the top 50 most populated US areas. Following this deal, Seven & i will overtake its closest rival, Canadian firm Alimentation Croude-Fund, in terms of market share, which will expand from 5.9% to 8.5% of the US convenience store market. Also, by capitalising on its expertise in the convenience store sector, Seven & i aims to upgrade Speedway’s shelf products to a more attractive combination of own-brand products in a move to improve profitability.
Speedway’s seller to focus on core business
Ohio-based Marathon Petroleum, the parent organisation of Speedway, came under pressure in October last year from activist investor Elliot Management, who claimed that they should split into three separate companies as there is little to no synergies of Marathon’s three different businesses of refining, pipelines, and retail. Soon after, Marathon announced its intention to separate Speedway into a standalone business, helping the petroleum group focus on their primary refining business.
This acquisition includes a 15-year fuel supply agreement, where Speedway will purchase approximately 7.7 billion gallons of fuel from Marathon annually, generating $16.5bn in after-tax proceeds over the course of the deal, which will be used to return funds to shareholders and pay off its debt. Michael J Hennigan, CEO of Marathon Petroleum, emphasises the potential benefits of working with the Japanese retail giant, saying that “the establishment of a long-term strategic relationship with 7-Eleven creates opportunities to improve our commercial performance”. However, selling Speedway will leave Marathon far more reliant on its oil refinery business at times when the group’s refining margins are coming under pressure, with the group set to lose the $1.5bn in stable earnings provided by the convenience store chain.
Investing in the oil industry
The coronavirus pandemic, which has triggered the worst oil demand crash in decades, makes it a risky time to acquire Speedway, a business where three quarters of the revenues are generated from fuel sales. Furthermore, with the International Energy Agency pushing for 30% of vehicle sales to be electric by 2030, the transition towards electric cars may lead to a long-term decline in demand for fuel and gas. Given the changing nature of oil demand both at present and in the future, this deal makes Seven & i more heavily affected by these trends now that its dependency on gas for gross profits for its overall business will rise from 20% to 30% following the acquisition. Seven & i may need to accommodate for this transition to electric cars by investing in charging stations to avoid losing revenues in the long-run as fuel demand is set to decline, as noted by Nikkei Asian Review.