Seven & i’s Acquisition of Marathon Petroleum’s Speedway
By: Sargun Sareen, John Schleider, Zain Haji
Overview of the deal
n August 2020, Seven & i Holdings’ subsidiary 7-Eleven agreed to acquire Speedway for $21 billion in cash. The deal, which includes a 15-year fuel supply for 3,900 gas stations acquired, was almost closed earlier this year, however, negotiations were abruptly stopped due to economic uncertainty created by the coronavirus outbreak.
The strengthening of the yen and a $1 billion price reduction prompted the retail group to eventually close the deal. S&i aims to use this opportunity to further penetrate the American market as Japan faces macroeconomic uncertainty with a declining population. Joseph DePinto, President and Chief Executive Officer of 7-Eleven said “This acquisition is the largest in our company's history and will allow us to continue to grow and diversify our presence in the US, particularly in the Midwest and East Coast.” Ryuichi Isaka, Seven & i’s president, stated “[Speedway] will be a source of our growth in five years, ten years down the road.”
Company Details: Seven & i Holdings
Seven & i Holdings, headquartered in Tokyo, Japan, is a Japanese retail group founded in 1920, one of the largest in the world. It generates more than $60 billion in revenues each year and is involved in superstores, financial services, department stores and convenience stores. It owns various brands such as 7-Eleven, Barneys New York and Seven Bank.
CEO: Ryuichi Isaka
Number of employees: 144,628
Market Cap: $29.78 billion
EV: $29.05 billion
LTM Revenue: $60.64 billion
LTM EBITDA: $3.87 billion
LTM EV/Revenue: 0.57x
LTM EV/EBITDA: 4.55x
Company Details: Speedway LLC
Speedway LLC, headquartered in Enon, Ohio, is an American convenience store and petrol-station chain founded in 1932. It operates in the Midwest and East Coast and is a subsidiary of Marathon Petroleum Corporation. It operates in 32 states and is the largest convenience store chain in central Ohio.
CEO: Michael Hennigan
Number of employees: 40,320
Market Cap: $26.5 billion
EV: $16.8 billion
LTM Revenue: $26.8 billion
LTM EBITDA: $1.6 billion
LTM EV/Revenue: 0.64x
LTM EV/EBITDA: 11x
Strategic Rationale and Short-term consequences
Through the acquisition of Speedway, Seven & i is able to consolidate and diversify its portfolio. The US convenience store industry is largely fragmented, with the shares of the top 10 chains totalling to less than 20% (Seven & i Holdings, 2020). The acquisition allows the company to cement its position in the US market and shift its focus beyond Japan, which is facing a diminishing population, slow economic growth, and increased price competition. In contrast, the US macro environment seems especially favourable due to its rising population and higher consumer spending.
Despite the current uncertainties in the retail and gasoline markets and a shift towards alternative fuel, the estimated fuel consumption has a predicted CAGR of +0.3% between 2030-2050 (Seven & i Holdings, 2020). Therefore, given that Seven & i maintains a strong focus on its ESG agenda and the US climate policy, this acquisition allows the company to delve into the energy sector while expanding 7-Eleven’s retail brand (Inagaki, Wiggins and Brower, 2020).
The addition of Speedway to the 7-Eleven chain will result in a combined 14,000 stores. Importantly, the acquisition is beneficial in terms of geographic footprint. Speedway stores have little overlap with the 7-Eleven chain; complimentary locations allow 7-Eleven to have a presence in 47 of the top 50 most populated metro stations following the transaction (Seven & i Holdings, 2020). As such, 7-Eleven will be able to utilise customer loyalty to Speedway to further develop and consolidate its presence in the US.
For Marathon Petroleum, the all-cash nature of this deal means shareholders get an immediate return instead of having to wait for Seven & i to execute their long term strategy. In this way, investor concerns regarding Marathon’s future financial performance are resolved. Due to Covid-19, Marathon has been struggling financially, completely stopping operations in 2 refineries due to tighter environmental guidelines (Krauss, 2020). Elliot Management, an active investor, was keen to divest certain business areas to address Marathon’s underperformance in the past few months. This acquisition addresses such concerns and is expected to net $16.5 billion in after-tax cash proceeds that will largely be used to pay debt obligations and dividend payments, making it an attractive proposition for Marathon Petroleum’s shareholders.
During this period of economic downturn, Seven & i can leverage Speedway’s expertise in 7-Eleven’s distribution network, ultimately increasing profitability. Synergies totalling between $475m-$575m are projected for Year 3 (Seven & i Holdings, 2020). Pro forma analysis also predicts that Speedway’s acquisition will increase Operating Income and EBITDA by more than double the FY2019 results (Seven & i Holdings, 2020).
Revenue synergies can be realised by increasing Speedway’s merchandise sales per store, through further diversified products, driving significant revenues and margin growth. Key cost synergies include 7-Eleven’s greater purchasing power and its ability to achieve economies of scale with a combined network of supply chains (Ando and Singh, 2020). Enhanced global operational capabilities will allow 7-Eleven to solidify their position within the US market.
Additionally, Seven & i plans to reduce the purchase price of $21 billion through $5 billion worth of sale leasebacks, the US tax scheme saving $3 billion, and $1 billion from alternative asset strategy net proceeds. In fact, synergies reduce the EBITDA multiple from 13.7x to 7.1x, relieving some concerns surrounding the deal price being only $1 billion lower than what was offered pre-Covid.
In summary, the acquisition of Speedway is indeed strategic; the current economic climate allows some companies with strong balance sheets to capitalise on relatively lower deal prices. Seven & i is able to gain a competitive advantage within the industry, increasing their market share in the US from 5.9% to 8.5% (McFadzean, 2020). However, with a Biden administration, there is uncertainty surrounding the future of climate policy. As such, Seven & i Holdings will have to monitor their ESG goals as well as closely follow the market trends of electric vehicles.
Risks and conclusion
This investment carries three large risks for Seven & i. First, as with any transaction of this scale, integration risks are present. Speedway and 7-Eleven combined will cover a large area of the United States with complex downstream supply chains, so it might take time and money for the two to fully integrate. Second, the new Biden administration might take climate change action that would harm Seven & i, as could the Democratic-held House of Representatives, which has the special power to change taxes without the Senate, which the GOP is likely to hold. The intensity of these potential measures are still unknown. Finally, the changes in human behaviour wrought by COVID-19 might become permanent. Thus far, the pandemic has negatively affected travel, on which convenience stores rely. This final factor was the reason negotiations were called off earlier this year.
On the day of the announcement in August, Seven & i shares fell 4.8% in Tokyo; investors were unhappy that the acquisition price is only $1 billion less than what was suggested in March. Marathon shares rose 9% in New York, reflecting the all-cash nature of the deal. But, it seems through this deal Seven & i will reach its goal of compensating for declining revenues in Japan.