(Reuters) – The Japanese owner of 7-Eleven convenience stores has agreed to buy Marathon Petroleum Corp. MPC.N Speedway gas stations for $ 21 billion, dismissing coronavirus concerns to return to the table five months after initially declining the deal.
The acquisition is one of the biggest of this year, suggesting that the pandemic, while forcing many companies to focus on protecting balance sheets rather than expanding, hasn’t completely killed global deals.
This move will help Seven & i Holdings Co Ltd 3382.T focus beyond Japan, where its stores and supermarkets face shrinking populations, slow economic growth and fierce price competition.
The deal brings its number of 7-Eleven stores in the US and Canada to around 14,000, adding to a portfolio that was fattened three years ago with a $ 3.3 billion purchase from Sunoco LP DIM.N – strengthens its lead in convenience stores on Alimentation Couche-Tard Inc of Canada ATDb.TO.
Seven & i shares fell 4.8% on Monday in Tokyo amid concerns over a price just $ 1 billion lower than the company reportedly turned down in March. Marathon shares rose 9% in pre-market trading on the New York Stock Exchange.
Analysts and investors then said the price was too high given concerns about a global economic slowdown induced by the pandemic. Oil prices and fuel consumption have fallen this year as more people work from home and avoid travel.
Seven & i chairman Ryuji Isaka said expansion in the United States was always beneficial given its growing population and economy, regardless of the impact of the pandemic on consumer spending.
“The coronavirus is not going to last forever,” Isaka said on a conference call after the deal was announced.
While he declined to discuss the reasons why the company returned to the business table, he said: “We have made the decision from management that these assets will be a source of our growth in five years, 10 years. later.”
He said the retailer is keen to strengthen the food offering in U.S. stores, in the same way that its Japanese 7-Eleven stores have become popular for their ready-to-reheat meals and packed lunches.
The 7-Eleven brand started in the United States, but the Japanese subsidiary has seen much more success as its 24-hour open policy and franchise system have proven to be ideally suited to a dense population and a culture of night work.
The global chain is now owned by Seven & i, one of Japan’s largest retail groups, with a market capitalization of around $ 27 billion.
The deal comes after Marathon launched a sweeping restructuring last year, including a spin-off of Speedway, under sustained pressure from activist investor Elliott Management.
Marathon said it expects the deal, approved by the boards of the two companies, to close in the first quarter of 2021 and generate after-tax proceeds of around $ 16.5 billion that it will use to pay off some of its over $ 30 billion debt and for shareholder returns. .
America’s largest oil refiner by volume also said the deal includes a 15-year fuel supply agreement for around 7.7 billion gallons per year associated with the Speedway business.
Seven & i predicts savings of $ 475-575 million through increased purchasing power and other advantages of scale through year three of deal closing, along with compound annual growth more than 15% of 7 – Eleven’s operating income.
The group said it would pay through debt and loans, without equity financing.
Rating firm S&P had said at the previously announced deal price of $ 22 billion that Seven & i’s key debt-to-EBITDA ratio would rise to around 4, from 1.6 last year. A ratio above 4 or 5 is often a red flag for rating agencies and investors.
The retailer said on Monday it aimed to lower the debt-to-EBITDA ratio to below 3 within two years.
Japan’s credit rating agency said the deal would help 7-Eleven build its earning capacity, but still put the Japanese company on negative watch.
“It will take time to recover the financial structure,” he said.
Reporting by Ritsuko Ando in Tokyo and Kanishka Singh in Bengaluru; Editing by Dan Grebler and Christopher Cushing