Seven & I Battle Has Just Begun
Dan Loeb has won a notable battle in his drive to shake up corporate Japan. He still faces a long war.
When the Tokyo Stock Exchange opened on Thursday morning, the Third Point founder's plans to change the direction of 7-Eleven owner Seven & i looked in disarray. The Yomiuri newspaper had reported that the board was planning to replace Ryuichi Isaka as head of the company's convenience store business -- a snub to the New York-based fund manager, who'd recommended Isaka as a successor to 83-year-old Chairman and Chief Executive Officer Toshifumi Suzuki.
The shares fell as much as 8.6 percent as the board met, before rallying after a company spokesman confirmed they had voted against replacing Isaka. The real prize came in the last 20 minutes of trading, though, after the Nikkei reported that Suzuki himself was planning to step down. The stock rose sharply and closed the day down just 1.6 percent. Suzuki confirmed the report after the market closed, and Seven & I jumped as much as 5.1 percent in Friday trading.
Suzuki's is a significant scalp. He had run Seven-Eleven Japan and Ito-Yokado, the supermarkets chain with which it merged in 2005 to create Seven & i, since the 1970s. Loeb, who's not famed for his diplomacy, last week accused the company of planning to appoint Suzuki's son Yasuhiro as his replacement, and said that such a move would smack of nepotism. To insult the aging head of a Japanese corporate dynasty and get away with it is quite something. To get the board to come round to your point of view as well -- that's little short of astonishing.
Third Point still has a long road ahead. While annual results Thursday confirmed Loeb's (and Gadfly's) thesis that the 7-Eleven convenience stores are propping up the Sogo & Seibu department store chain and Ito-Yokado supermarkets, they also brought in the usual end-of-fiscal-year profit bump for the underperforming chains.
The board, despite facing down Suzuki, remains dominated by veterans of Ito-Yokado. It's hardly a hotbed of Loeb loyalists, and Isaka's chances of promotion look bleak given that seven of the company's 15 directors voted to demote him Thursday. If you believe the company's published forecasts, loyalists of the supermarket chain will now have more ammunition to argue that the status quo shouldn't be shaken up any further: While operating income will grow just 3.7 percent at the convenience stores next year, Sogo & Seibu and Ito-Yokado are set to bounce back with earnings forecast to rise by 114 percent and 250 percent respectively 1 .
Loeb is unabashed in championing the changes that Prime Minister Shinzo Abe's government wants to make to Japanese corporate culture and society, but some cultural shifts are harder than others. Seven & i needs to do more than just remove its founder for Third Point to come out ahead -- shares in the business are down about 19 percent since the investment was first reported in October.
When U.S. naval commodore Matthew Perry brought gunships into Tokyo Bay in 1853, the show of force helped spark Japan's opening to the world and industrialization. But that's not the typical human reaction to intimidation. Getting Seven & i's board to agree to Third Point's radical prescription was always going to be difficult. How much harder will it be now this latest band of American raiders has dethroned its leader?
That's growing from a base that is barely positive, so isn't as impressive as it appears. Even if the two chains meet that earnings growth target, they'll account for just 8.6 percent of operating income, compared with 81 percent at the convenience stores.
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