By Svea Herbst-Bayliss and Makiko Yamazaki
NEW YORK/TOKYO (Reuters) -Additional shareholders in Seven & i Holdings are pushing the company to spin off its 7-Eleven convenience store chain and want new directors on the board as investor frustration with its conglomerate structure intensifies.
Conglomerates are seen offering rich pickings for investor activists in Japan, which has become one of the world's most popular destinations for those looking for targets with big potential for change.
"We think the company should spin off 7-Eleven and that this could help close the valuation discount," Artisan Partners (NYSE:APAM) Associate Portfolio Manager Ben Herrick told Reuters.
Herrick works with the U.S. investment company's International Value Team which has owned Seven & i shares since 2019 and currently holds around 1% of the Japanese company, which is valued at $38 billion.
"A rational and experienced board of directors would understand their fiduciary duty and spin off the Seven Eleven business to existing shareholders," said James Rosenwald, chief investment officer of Dalton Investments. "The market would likely value the new spin off at more than the entire company today."
The investors spoke days after U.S. investment firm ValueAct pushed Seven & i, the world's largest convenience store operator, to explain its corporate strategy when it reports earnings on April 6.
"ValueAct has made proposals and asked questions that shareholders deserve answers to," Herrick said.
Investors, including a Japanese institutional investor contacted by Reuters that is not permitted to discuss its views publicly, are blaming Seven & i's stagnant share price on management's attachment to a conglomerate structure.
They want new board directors who can hold management accountable for failing to push ahead with a proposed spin-off or even sale of the entire company, they said.
SPIN-OFF PROPOSAL
Three months ago, ValueAct proposed a tax free spin-off of 7-Eleven, via a listing on the Tokyo Stock Exchange in roughly one year. It estimated that over 10 years a 100% spin-off of 7-Eleven would result in a shareholder value that is 80% higher than maintaining the current conglomerate structure.
Last month, Seven & i announced the results of a strategic review and said it would close an additional 14 Ito-Yokado supermarket stores in Japan and would fully exit its apparel business. Its shares have fallen more than 10% since the announcement.
For some investors, the review did not go far enough. They told Reuters there was no financial justification for the synergies the company cites as reasons for keeping its businesses together.
One investor said 7-Eleven, the company's crown jewel, will stop shining brightly unless it is spun off.
A representative for Seven & i declined to comment.
Some investors have also asked management to consider selling the entire company, at the right price, to allow others to break up the business.
Now some investors, who have been critical of the company's management for years, said they wanted new blood in the boardroom.
ValueAct has nominated four director candidates to replace four incumbents on the 14-member board at the annual meeting in May. A source said Seven & i president Ryuichi Isaka is one of the board members ValueAct wants to replace.
This marks a change in tactics by ValueAct, run by Mason Morfit, which often pushes for changes out of the limelight. It has board seats at two other Japanese companies - Olympus and JSR Corp.