Couche-Tard and 7-Eleven's store divestiture plans face an early obstacle

The plan of convenience store giants Couche-Tard & Seven & i to sell thousands of stores in North America, to reduce regulatory concerns before a possible merger, is being tested by rival bidders.

According to several antitrust experts and people who are familiar with the situation, it is likely that the two store operators will struggle to attract offers from other convenience stores chains. They may be wary about their own antitrust risks from a potential deal. Seven & i is the owner of the 7-Eleven chain, which operates more than 12,000 convenience stores in the U.S.

Sources said that so far, private equity firms have been the most interested in buying the stores. The potential for a headache for Canada’s Couche-Tard, and Japan’s Seven & i is that U.S. regulators frown on private equity firms buying divested stores as they are not likely to be long-term investors.

Experts say that the U.S. Federal Trade Commission doesn't view private equity firms as attractive buyers of divested retail stores because the model is based on short-term profits.

Michio Suzuki is an antitrust partner with Baker McKenzie, based in Tokyo. From their perspective, the buyer of the divested stores should be strong enough so that they can run them as a competitive unit.

The companies have proposed a divestiture package that includes more than 2,000 U.S.-based stores. Experts said that there was no precedent in which private equity ownership of convenience store chains would be created after a large merger.

Financial acquirers bought grocery and dollar store divested from larger retail mergers. However, they have had mixed success running these stores.

When Dollar Tree bought Family Dollar for $9 billion in 2015, the FTC ordered the companies to divest hundreds stores. Dollar Tree selected investment firm Sycamore as the buyer of 330 stores. But two years later Sycamore sold them to Dollar General as it was no longer able to operate the stores as a standalone business.

Sources familiarized with Couche-Tard & Seven & i argue that their divestiture packages consist of competitive stores across many states, which a private equity company can successfully operate.

Five sources claim that buyout firms have shown early interest in the companies. They are eager to explore owning scaled-up convenience stores with a national footprint. Three sources stated that some firms are cautious when it comes to bidding for an asset that will be the result of a merger which is still not signed.

KROGER ALBERTSONS FALLOUT

In recent years, antitrust regulators around the world have been increasingly challenging large retail mergers.

In order to avoid the overhang of a failed mega-deal in U.S. groceries, Couche-Tard & Seven & i took the unusual step before merging talks began: they preemptively shrank their combined potential business in North America.

Seven & i wants to avoid a repetition of "the disastrous story" of Kroger/Albertsons. Seven & i received a warning from the FTC about an investigation of a possible merger with Couche-Tard - a rare occurrence before a formal deal is signed.

The Kroger-Albertsons merger was announced for the first time in 2022. However, despite numerous attempts to convince U.S. Antitrust authorities to approve the deal - such as a $2.9 billion proposed divestiture of C&S Wholesale Grocers' 579 stores - this deal has not been approved. The FTC rejected C&S and called the divestiture packages a "hodgepodge" of unconnected shops.

Alex Livshits is a partner with the law firm Fried Frank. He said, "Any target of a large-scale retail-store merger will take notice and become very cautious following that." Since August, 7-Eleven's owner has rejected Couche-Tard takeover attempts out of fear that it will suffer the same fate. The grocers gave up their $25 billion merger in December after significant regulatory opposition. This has been argued before as a cautionary story for retail mergers.

Couche-Tard has agreed to the proposal of early joint regulatory work by Seven & I to alleviate potential antitrust concerns.

Seven & I is the largest operator of convenience stores in the United States, with approximately 12,650. Couche-Tard is second-largest with about 7,100. Couche-Tard, with approximately 7,100 stores, is the second-largest operator in terms of convenience stores in the United States. The combined company would almost be seven times larger than the next biggest competitor, Casey's.

There is a risk when you divest to a third-party that's legally binding, said Kathy O'Neill. She's a partner with Fried Frank and a former member of the Department of Justice's Antitrust Division.

She said, "The agency may not like the buyer that you have selected or they might decide to divest more assets or store."

Normally, companies seek regulatory approval after signing contracts.

Experts said that the failure of the Kroger and Albertsons merger has provided a road map to successful regulatory approval in future retail mergers. It is a lesson on what not do. Experts said that Couche-Tard's and Seven & i's pre-emptive action also gives them the opportunity to get regulators on board with the idea. Reporting by Abigail Summerville and Anton Bridge, New York; Additional reporting by Rocky Swift, Tokyo; Editing and production by Anirban Sen, Edwina G Gibbs and Matthew Lewis.

(source: Reuters)