Seven & i/ValueAct: Japan Throws ‘Closed’ Sign At Activist

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Conbinis are convenience store chains that sell everything from rice balls to umbrellas. They are as intrinsic to Japanese economic life as hostility to foreign activists. The two themes became intertwined on Thursday when Seven & i Holdings shareholders voted against all four of the board nominees nominated by the US ValueAct.

Compassion. The reforms suggested by the low-profile US hedge fund have been reasonable.

7-Eleven convenience store operator struggles with a heavy conglomerate structure. This extends from financial services to hotel management and underground car parks. ValueAct wants Seven & i to focus on combining profitable and spin off underperforming companies.

ValueAct also wants Ryuichi Isaka replaced. But more than three-quarters of the votes on Thursday were in favor of the group chairman.

Cultural factors may be at play. Japanese investors may be more tolerant of vertical integration. For example, a subsidiary that produces shiitake mushrooms might supply them to group parties and restaurants.

But ValueAct has good financial justification for requiring a narrower focus. In recent years, some Seven & i activities have continued to experience delays. Department stores posted net losses. Seven & i folded last year and said it would sell the ailing unit, Sogo & Seibu, to US fund Fortress. Isaka gave ValueAct no credit for this.

However, the actions reflect growing approval for the move strategy. ValueAct, which has a 4.4% stake, has been a shareholder of Seven & i since 2020. During this period, the shares and their valuation on an Enterprise Value-to-Forward Ebitda basis have doubled.

This year has been good for investors so far. But even after gains of a fifth for the leading market index, valuations remain below the 10-year average on a forward earnings basis.

Repeated disappointments risk alienating foreign activists, who authorities recognize can be instrumental in boosting returns. Conbinis are a tradition worth preserving. Thoughtful votes in favor of management are not.

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