By Jacky Wong
7-Eleven is paying top price for its shopping trip in the U.S.
The convenience-store operator has agreed to pay $21 billion to buy gas station chain Speedway from Marathon Petroleum. Activist investor Elliott Management has been pushing Marathon for a split. The deal will add about 3,900 stores to 7-Eleven's existing 9,800 in the U.S. and Canada as its Japanese owner tries to diversify away from its slowing home market.
7-Eleven already bought more than 1,000 U.S.-based convenience stores and gas stations from Sunoco for $3.3 billion two years ago. Partly helped by the Sunoco acquisition, 7-Eleven parent company Seven & I's revenue in North America has grown 50% in the past four fiscal years, while that in Japan has fallen 8%.
The Speedway deal--7-Eleven's largest ever acquisition--does, however, look a bit pricey. Morgan Stanley has estimated the value of Speedway's business at around $17 billion. Seven & I's shares plunged 4.8% Monday as investors also worry the deal could add more debt. A strong yen--which has risen against the dollar 2.6% this year--and falling interest rates would help, though the deal is still big to digest considering Seven & I's market value is only $25.4 billion.
7-Eleven is willing to pay the premium as it expects to extract $3 billion of tax benefits and $5 billion of net sale leaseback proceeds. It also hopes to generate $475 million to $575 million of synergies a year. 7-Eleven's large store network will help move toward achieving that goal, though managing such large-scale cost savings won't be straightforward. Leveraging on its convenience-store expertise, it hopes to sell more goods, which earn higher margins than gasoline, to drivers who have to stop by to fill up their tanks. Gas stations seem to offer a stable customer base but gasoline sales, which would contribute to 30% of 7-Eleven's gross profits after the deal, have been stagnant as cars have become more efficient. The rise of electric cars poses a long-term risk.
The Speedway deal offers convenience to 7-Eleven but it could be pricey.
Write to Jacky Wong at JACKY.WONG@wsj.com