Exclusive: ValueAct calls for Seven & i to spin off 7-Eleven retail chain

The logo of Seven & I Holdings is seen at its headquarters in Tokyo, Japan December 6, 2017. REUTERS/Toru Hanai

NEW YORK, Jan 19 (Reuters) - Hedge fund ValueAct Capital urged Seven & i Holdings (3382.T) shareholders on Thursday to back a spin-off of the company's 7-Eleven convenience store chain, arguing the move would improve the conglomerate's valuation and corporate governance.

The U.S.-based investment firm, which owns a 4.4% stake in the Japanese company and has been urging it to make changes for at least a year, called on shareholders to express their opinions on the matter to Seven & i's board.

In a letter reviewed by Reuters, ValueAct argued that a tax-free spin-off of 7-Eleven could be completed through a listing on the Tokyo Stock Exchange in roughly a year.

The fund, which is led by Mason Morfit and has spent decades working with companies behind the scenes, is arguing that a spin off of 7-Eleven would deliver considerable benefits to shareholders. But it also noted the board may receive a proposal to buy the whole company during its ongoing strategic review.

"ValueAct estimates that over 10 years the 100% spin-off of 7-Eleven capital restructuring would result in shareholder value that is 80% higher than maintaining the current conglomerate structure," the letter said.

ValueAct added that its assumptions were conservative because they do not factor in benefits such as efficiency improvements at 7-Eleven's U.S. operations.

"We understand that Seven & i can combine 7-Eleven, Inc. and Seven-Eleven Japan and execute a tax-free spin-off to launch a global champion 7-Eleven listed on the Tokyo Stock Exchange about 12 months from now," the letter said.

Seven & i is currently conducting a strategic review and has pledged to announce its decisions by early March. Among the other options under consideration are a sale of Seven & i itself, a sale or spin-off of its superstore business, or maintaining the status quo.

ValueAct said in its letter it was not happy with the pace of change at the company after six new directors joined the company's board over the past year, even as the investment firm commended the work of the newcomers.

"The debate at the board of Directors about the strategic review appears to be unresolved after four months of deliberation," the letter said, adding this could signal split opinions on the board or between executives.

The fund suggested shareholders might be able to break any impasse by making their views known.

A Seven & i spokesperson said the company would continue a dialogue with shareholders, but declined to comment further.

Ever since first making its investment in Seven & i known in 2021, ValueAct has said other investors have reached out to the firm about its references to a possible spin off of 7-Eleven. And while tax-free spin offs have been promoted by Japan's Ministry of Economy, Trade and Industry (METI) and large Japanese companies have discussed the matter, no one has done it.

"Seven & i Holdings could be the archetype of METI’s intent in introducing the spin-off reform," ValueAct wrote, adding: "We believe the tax-free spin-off of 7-Eleven is superior for shareholders and Seven & i’s other key stakeholders: customers, employees, franchisees, suppliers, amongst others, in the long term."

Over its two decade history, ValueAct has sought to work collaboratively and out of the limelight with companies where it urged changes. Here the investment firm is taking a more public approach for a number of reasons, including concerns that the strategic review has not been fully transparent, quick and failed to follow globally accepted norms.

The fund said it was possible or even "probable" that an acquisition proposal for Seven & i would be presented to the board during the strategic review, following a recent media report that the company received an acquisition proposal,

ValueAct said if there was no credible strategic plan, shareholders would expect the board to recommend to shareholders to accept an acquisition proposal if it "provides enough certainty of superior quantitative value."

Seven & i shares have risen nearly 5% so far this year, after gains of 12% in 2022 and 38% in 2021.

Reporting by Svea Herbst-Bayliss in New York; Additional reporting by Ritsuko Shimizu; Editing by Greg Roumeliotis and Mark Potter

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