Japan’s M&A push faces internal obstacles
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Kushtad has forced seven and I to change itself but still weak enough to allow management to act in their self-interest rather than shareholders interest. And that’s the thing that needs to change and it’s these large iconic deals that set the tone for everything else. In recent years, Japan has been signaling to the world that it’s open for business and more importantly inbound M&A. Well, now there are two deals that we can look at to test that theory. So, there’s one Toyota group’s attempted buyout of its key supplier and Canada’s Elementation Kushdard at his failed $46 billion takeover of 7i. Now, why are these deals failing? Why are they so complicated? And what do they mean for Japan’s economy? Let’s find out in this week’s newsroom. It’s Amy and it’s the Views Room, the weekly podcast that answers the naughtiest questions in corporate finance, business, and economics. And unfortunately, I don’t have Jonathan with me today. When we’re doing Asian podcasts where we focus on Japan, it’s quite hard to get the US, Asia, and uh Europe into the same conversation. So it is just me but I have Una Galani who is Asia editor of Breaking Views and Anthony Curry who is based in Australia and is an associate editor and they have both been really focusing on these deals quite a lot. Know an awful lot about Japan. So uh I’m very excited by this conversation. So Una Anthony you are very welcome to the newsroom. Good to be here. Sorry sorry sorry Jonathan isn’t committed enough to jump on this at 3:00 in the morning his time but indeed. Hi Amy. Hi Una. So Una, as I said, you are you are the supreo Asian editor here at Breaking Views. So can you explain these two Japanese deals? Why they have cover, you know, captured so much attention everywhere, I think, but very specifically certainly at breaking views, I think our readers are really interested in these deals. Yeah, Amy, I think we should take a step back here. I mean investors have been really excited about Japan for the past couple of years and that’s spurred a really big stock market rally and record levels of deal activity and there is a sense in Japan that all the stars are aligning for a new economic and corporate era in the country. You know Japan is exiting decades of deflation. It looks like the government’s efforts to drive efficiencies in the economy including by forcing Japan Inc. to behave in a way that is more shareholder friendly is yielding some fruit. And Japan has been on a mission basically for the last decade to try and make its companies use its resources more efficiently and be more welcoming of takeover proposals. The late Shinsai Abbe when he was prime minister he kicked off this push and it’s really important because with a shrinking population is the only way for the economy to grow. So the two deals that you referred to at 7i and Toyota Industries, they’re both really interesting because they offer a verdict of sorts really on Japan’s longstanding effort to move in this direction. It’s very interesting. It’s definitely a big question. I mean, I was at a conference a couple of months ago here where some of the big superanuation investors were asking this very question. Is is this finally when Japan does what it’s been talking about forever? I mean, I I know I don’t look it, but I’m old enough to remember that what was it, 2002, when JC Flowers and Ripplewood bought long-term credit bank, and it was meant to be, oh yes, it was a troubled bank, but also it was meant to be like yet another sign that maybe, just maybe, Westerners could come in and do something and it just kept on sort of not living up to snuff, whereas now maybe, just maybe, we’re getting there. So, so Una, can you talk us through the corporate governance changes in Japan? So, like what are they enticing foreign investors? We can see certainly that there is interest in M&A but is it is it doing what they hoped it would? Is it is it working ultimately? Yeah, that’s a great question. So over the past decade and you know things move slowly in Japan so we do have to think about things over that time horizon. Uh Japan has introduced a stewardship code. It’s more recently introduced fair M&A guidelines. Uh it’s encouraging companies to weigh up takeover proposals with shareholders in mind. It sounds very basic but you know isn’t in Japan. Um and Japan’s stock exchange under its CEO Yamagianis has been nudging companies to disclose plans to improve their valuations as a multiple of book value. He’s basically been trying to embarrass companies that don’t live up to this sort of value push initiative. Um and this is all fair game in Japan because so many companies are undervalued. Right? So management have not focused on creating shareholder value. companies sit on piles of cash. They’re reluctant to shed underperforming businesses. They also feature a lot of something we call them cross shareholdings. And this is what where large companies take strategic stakes in each other to fend off hostile bidders. So there’s been a lot of legislation or guidelines issued over the past decade to try and encourage companies to be more open to takeover of proposals. Um is that value push working? I mean Japan’s targeted M&A activity could hit a 10-year high this year. Domestic M&A activity is very very strong on the back of corporate restructuring. But if you just look at those two deals you flagged, you would reach the conclusion that it is not working. So Anthony, Toyota, this is uh I have to say this is a deal that is really interesting, but I have to say I’m even struggling to kind of piece it all together and try and figure out what is happening here. So can you talk me through exactly what is happening, why this is so controversial? Oh, yes. I mean, it’s the simplest deal to humanity. I mean, come on. I mean, but so so look the pro I think the problem with explaining this is that for the vast majority of people sarcasm sarcasm alert everybody if you didn’t hear that I I don’t know what that is. I’ve never heard of that word. Um but the I think for the vast majority of people outside of outside of Japan when they hear Toyota they probably think Toyota motor and that’s it. Well the Toyota group which isn’t a listed entity it’s an amalgam of all the various entities. Toyota group is made up of a bunch of different I think almost two dozen different companies listed and long listed mostly listed. Toyota industries which is the subject of this buyout uh this 33 billion well to 40 billion by depending on how you count the numbers um is effectively the parent company to all the other companies was set up 100 years ago. Toyota Motors was spun out of it in the 1930s. Um it still actually provides a degree of servicing to Toyota Motors. I think it makes the RAV 4 SUV. Uh builds some engines, a few other things. I think 2% of Toyota industry’s top line still comes from uh Toyota Motor. Um but you know, you’ve got a bunch of other entities as well. There’s Deno, Toyota, all of which are involved in this deal as well because they all have cross shareholdings in each other. So Toyota Motor and Toyota Industries are the largest invest uh uh shareholders in each other, right? and Denso, Toyota Tusho and a couple of others are smaller shareholders uh and they also have stakes um uh in them from Toyota Industries. So that makes this initially really difficult. But yeah, also a reason why this deal on the face of it ought to get done because unlocking all of these cross shareholdings is what is what all the new rules and regulations in Japan are meant to be about, right? So number one, lots of cross shareholdings, massive company with all these different company structures underneath it. Toyota Motor is involved not because it wants to buy it. What’s yes, it’s its old parent, but is effectively a subsidiary because it owns 25% of Toyota Industries. It’s involved, yes, because it owns 25%, but also it’s effectively financing this deal. It’s providing the vast majority of the six billion in dollars in equity that is going into this buyout. is doing so by effectively swapping its 25% common equity stake with with um voting rights for preferred stock with no voting rights. And what that means uh and it’s also getting giving a few funnies away that that make life a bit easier for the for for the main buyer in this which we can get to in a minute but it’s basically allowing um it’s some of its stake not to be bought back by Toyota Industries until after the deal’s done. So you don’t have to raise as much money um hence the 3340 billion difference I mentioned earlier. So, they’re really helping out here, Toyota Moto, but they won’t end up officially running uh the buyout. That goes to yet another Toyota company, Toyota Fudasam, which until now has been known as this sort of I wouldn’t say shadowy. It’s not all shadowy. It’s just no one really talks about it. It’s seen as like the the family’s the Toyota family’s real estate and investing company. It’s unlisted. um 80% of it is owned by the sub five of the biggest Toyota companies including Toyota Industries which owns I think 20ish% I’m going to going to say. So it really is sort of you know the cross share holdings are still in existence in a different form after this deal is done. So Toyota Ferdisan will end up basically controlling it for a very small equity stake. The third player in this in this buyout, Toyota Motors funding most of it, Toyota Futurisand funding a bit and also basically running it officially. The third player is Akio Toyota who’s the official head of the family and also the chair of Toyota Motor. He’ll end up with about a 0.5% stake in Toyota Industries, which is about 10 times what he’s got at the moment. And he’s reinvesting the money he’s getting from selling his his his shares in the deal. So he’s not really adding any money in nor in fact he’s try to food but hey let’s not get bogged down in complexities. I mean effectively what this is a time when activists are circling Japan and a lot of companies that are underperforming or that look like they may have lots of sort of hidden value to unlock are coming under the attention of activists. And so if you are a large sprawling Japanese conglomerate where the connection between all your separately listed companies relies on cross shareholdings and a wink wink nod nod we’ve done business forever haven’t we type of scenario then this is the time and the moment that you have to preemptively defend those positions. So on the one hand, Japan under the stock exchange is pushing companies to unwind their cross shareholdings, but if you unwind the cross shareholdings, then what binds you together anymore or what protects you as a company? And so effectively, Japan Inc. Toyota Motors or Toyota group is closing rank. Um, and they’re sort of just sort of they’re doing this now because the environment around them is changing. And if they don’t do it now, then they could lose control of this company. I suppose that’s why this is very interesting in a way, right? Because as you’re saying, Una, if you were to do what I suppose the activists and what the the Japanese government and regulators want is that these things would be unraveled or they would be made, you know, final in some way. But that sort of unravels the way Japan has been operating, the the Japanese Japan Inc. has been operating. So I I think that is that is a really kind of fascinating element of all of Yeah, it’s almost as if it’s like the the stock exchange are allowing a sort of degree of transition, right, into a new entity. So, I mean, the other the other weird things about this, first of all, Toyota Industries has suddenly stopped paying dividends, right? This deal isn’t closing to December. So, if you’re a shareholder, you don’t get dividends anymore. Also, all the stakes that um um are being bought back off Toyota Industries, that’s by by the other Toyota group companies. That isn’t happening till after the deal is done either. So yes, current shareholders, independent shareholders are getting a 23% premium to the undisturbed price when no one cared about the company and it was all about Toyota Mo, the Toyota Motor Stake. But most of that money then goes to the uh the new owners Toyota group um which can then use it to pay off three quarters if they want to threequarters of the 20 billion of debt they’re borrowing to do this deal. So it’s all done to make it much easier um for Toyota group to do this deal. And then you don’t forget the shareholdings. 43% is owned by the Toyota group in total. Add in all the sort of friendly corporations who also own stakes. You’re looking at 55% I think owning um Toyota Industries. It’s going to be pretty hard to stop this deal. Well, the other problem with this deal is that you’ve got Japan. Toyota Motor is Japan’s largest listed company. And so if there is or should be any flag bearer of Japan’s value push, it ought to be the largest listed company in the country. But it’s but Toyota Motor has actually re been a bit of a hold out in this broader uh embrace of the shareholder value push in Japan. I mean the company’s shares have actually done well and it’s not a lagard of the index by any means but it sort of dragged its feet in subscribing to some of the initiatives that the Tokyo Stock Exchange has had in terms of using the sort of shareholder value that language that the exchange wanted them to embrace. And the and the other thing was that the the offer for Toyota Industries that was put forward was below the last closing share price. So, you know, on the face of it as well, there was a big outcry in Japan because hang on, this is supposed to all unlock value and you’ve just put a low ball offer on the table that as Anony’s just explained can’t really be blocked and it’s very very complicated deal. you know, multiple multiple companies, a lot of creative financing, engineering, all to just get the result that Toyota Motors wants, which is, you know, to Toyota Motors or Toyota Group wants, which is more control of of the company. Well, listen, we could talk about this all day and I think it’s definitely fascinating. But we have another deal, Uno, which I’m very very keen to chat to you about, which is uh we have Alamement Kushtard, uh which uh if you don’t know this company, they own lots of petrol forcourts. They’re Canadian company. Um and they were desperate to buy the owner of 7-Eleven. Again, everyone kind of knows those convenience stores in the US. Uh but this is actually the Japanese convenience store operator. So again, UDA, this is just obviously very different to Toyota, but can you explain why the Canadian buyer, why Kushtard was so keen on buying this company and then I guess we can get to exactly what happened then? Yeah, I mean so Kushard owns the Circle K convenience stores in the US as you said and they were interested in buying 7 and I because 7 and I has a very large North American business as a lot of Japanese companies do. 7 and I has a very large footprint in the US because it bought Speedway gas stations for $20 billion in 2020 and Kushard lost out on that acquisition to 7 and I so pretty much since then they have been quietly keen on 7 and so Kushard was willing to pay $46 billion for the Japanese company and nearly 50% premium to the undisturbed share price that’s compelling by any measure. It had even signed a non-disclosure agreement, but Kushtard basically walked away this month after a nearly a year-long public effort to buy this company because they said there had been no sincere or constructive engagement for the company. And they sort of published this 1,000word letter of disapproval. Um, you know, just kind of complaining about uh how Japanese company had treated them. And it’s it’s pretty shocking um because 7 and I did make a bit of a show about appointing a special committee to assess the offer. But you know it was an open secret in Tokyo that 7 and I did not want to be bought. You know when people tried to claim that it would pose a national security threat to Japan if the 7-Eleven stores fell into foreign ownership. I mean 7 and I didn’t do much to quash that idea at all. So, you know, the founding uh and there was also the um the founding family uh also tried to launch a buyout of the company in the midst of all of this which failed. The founding family of seven night. Yeah. Yeah. Exactly. The Itto clan and um so that was obviously uh well that spoke volumes really. Yeah. That they launched it and then had to pull back and but they they but they threw out a bunch of of shareholders as well. Right. They’re going to try and list the the US business um and raise some money that way. They they they got a new CEO um there’s a few other things they’ve done which actually some of which they talked about already but they’ve been trying to do their own version of raising shareholder value but it seems if if if we believe what Kushad said and I think we probably largely do it’s not it’s pretty rare for a company to write a long screed that actually hasn’t happened about something that hasn’t actually happened. So, you know, if if you believe that’s happen, then basically it’s just been a sort of year-long waste for a very nice easygoing Canadian company to get nowhere. Yeah. I mean, I I guess Anthony is saying it’s not entirely back to square one for seven and I though, right? So, they’ve brushed off this bid and uh but they have been forced to change quite a lot, right? So, they’ve announced disposals. They’ve promised to return a lot of cash. They’ve even replaced their CEO with a foreigner. that probably would never have happened before in the old Japan Inc., but investors are now paying more attention to underperformance. So, this is the upshot of that. So, we we started this conversation out to sort of ask the question or answer the question about whether the changes Japan has been trying to make to M&A have actually worked. And so, what I’m getting from this conversation, and you guys can tell me if I’m wrong about this, but it seems like it’s baby steps, right? it we’re it’s not going to be any big deal. That sort of like signifies Japan has then moved on to this point where a foreign buyer can come in and just easily take it or that you have a company that’s very very clean in terms of like what it owns and its subsidiaries that it’s it’s very for an activist for example as you said UDA that they can see what a company owns in a very kind of like linear obvious way. Okay. I would say that we’re just at the very beginning of that. Yeah. I would just argue that and I just want to put this out there is that I think Kushtard could have tried harder, right? So they could have gone hostile and taken their offer to seven and I directly to shareholders and that would have been the real test of Japan shelter like let’s see what shareholders actually vote for. Will they vote for their own self-interest if given the opportunity directly? So Kushad never formalized its offer and I think a lot of that was wrapped up in this idea that I mean obviously there was some competition approvals that they would have needed in the US and that was a complex issue but a lot of it was also wrapped up in this idea that you know cultural consensus in Japan you don’t want to scare off the management um management is really hard to good management is very hard to come by in Japan there’s obviously less and less people these days so the talent pipeline reflects that but I do think yeah I mean you know this Japan’s economy is barely growing at all. So, Japan needs to do something. If Tokyo wants Japan Inc. to behave in a different way, they they’re going to have to turn some of these guidelines that they’ve issued into rules with teeth. And it’s pretty much as simple as that. Tokyo has to decide what they want Japanning to do and then put some teeth behind that. Anthony, what’s your take? You think we’re at the very beginning of this? Is this hopeful? Are there any big lessons we can learn from this? I go back to what these these big shareholders were talking about down at this event I went to recently. Is it real or is it not? It’s certainly a lot more real. There’s a lot more happening as Zuna pointed out earlier on. Um, you know, activists were involved in the seven and I before um Kushar came along. Um, you know, an activist is involved in a western activist I think is involved in um Toyota Industries. Whether they’ll have much luck is another matter. I think actually Kushtar probably had more luck as an activist than the activist did. Um, so it is tricky. Like I said earlier, I think the Toyota Industries deal sort of smacks of us some kind of almost like a transition deal, right? So we’re moving from what used to be the old ways to the new ways. But if we can just get what we can get out of this deal now, Toyota Group before we get to the new ways, would that be great? And the, you know, the stock exchange and the regulations regulators are basically allowing that. That’s the thing you need more teeth. That’s the thing. You, you know, there is enough activity to be confident things are moving in the right direction, but Japan isn’t a country with a lot of time. I mean, the economy is barely growing. population is shrinking and they you know they’ve had decades of deflation so they don’t have time to waste and so the problem is is that today the guidelines are strong enough to force companies to change Kushtad has forced seven and I to change itself but still weak enough to allow management to act in their self-interest rather than shareholders interest and that’s the thing that needs to change and it’s these large iconic deals that set the tone for everything else amazing very interesting thank you Anthony thank you una really really lovely. Thanks for tuning in. This podcast was produced by Cheryl Pena in New York and Gregory Garner in Toronto. You can listen to a new episode of The Views Room every Thursday on the Reuters app or your favorite platform. And don’t forget to tune in to our sister podcast, The Big View, every Tuesday, as well as the other great podcasts from the Reuters team. If you like what you heard, please follow the views room and let us know what you thought. And check out our views on the biggest stories in business and finance every day at breakingviews.com and Reuters.com.
Tokyo wants companies to embrace dealmaking (https://www.reuters.com/commentary/breakingviews/couche-tard-should-have-gone-hostile-seven-i-2025-07-17/) to boost the low-growth economy. In this Viewsroom podcast, Breakingviews columnists explain why the $33 bln buyout of Toyota Industries (https://www.reuters.com/breakingviews/toyota-is-japan-incs-ultimate-value-contrarian-2025-06-04/) and failed $46 bln bid for Seven & i offer a poor verdict on the official value push (https://www.reuters.com/commentary/breakingviews/toyota-buyout-capitalises-insiders-control-2025-06-15/) .
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