Seven & I Holdings' massive buyback plan has been placed on credit watch by S&P.
Investing.com -- S&P Global Ratings has placed Seven & i Holdings Co. Ltd. and its subsidiaries, Seven-Eleven Japan Co. Ltd. and 7-Eleven Inc., on negative watch. This move comes after the company announced measures to enhance shareholder value, including a planned initial public offering (IPO) for its North American convenience store subsidiary on March 6, 2025, and a total of ¥2 trillion in share buybacks.
The company’s shift away from its traditional conservative financial policies to a more shareholder-friendly approach has raised concerns about its credibility. The convenience store business, which significantly contributes to its credibility, is showing a slow recovery. This change in financial policy may slow the recovery of key cash flow metrics.
The decision to allocate a significant portion of cash generated from its subsidiary operations to shareholder returns, including share buybacks, rather than growth investments and debt repayments, is noteworthy. Share buybacks are expected to reach ¥2 trillion by 2030, constituting about 40% of the company’s current market value of approximately ¥5 trillion.
The decline in profitability of the convenience store business, which supports the company's credibility, may continue. Due to increased competition in Japan's mature retail market and the effects of inflation, a slow recovery in profits is expected. The North American convenience store segment, which accounts for about 60% of total EBITDA, is also expected to show a slow recovery due to inflation.
The debt/EBITDA ratio of the company’s non-financial unit is expected to worsen from 2.6x in the fiscal year 2023 to about 3.0x by the end of the fiscal year 2024 (February 28, 2025), due to the weak performance of the convenience store segment. Given the challenging environment for both North America and domestic convenience store operations, a significant increase in their total EBITDA of approximately ¥1.0 trillion is not expected over the next one to two years.
S&P Global Ratings will examine how Seven & i balances shareholder returns with financial conservatism over the next two to three months. This review will closely address the timing and scale of returns to shareholders, future growth measures for the convenience store business, financial policies, and debt tolerance.
Additionally, a potential acquisition of Seven & i by Montreal-based convenience store operator Alimentation Couche-Tard Inc. (ACT) could put further pressure on Seven & i's credibility. It is still unclear how the acquisition will be financed. If fully financed by debt, ACT's post-acquisition debt/EBITDA ratio could exceed 5x. The debt/EBITDA ratios of both companies were below 3x for the most recent period. If the acquisition is completed, the competitiveness, capital structure, and financial stability of the acquired company, along with the group's management structure, will be examined.
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