Mitsubishi's Marriage of Convenience

Mitsubishi's bid for control of Lawson looks opportunistic.
At Closing, June 15th
3205.00 JPY

It's amazing what people will pay for a little convenience. If you need UHT milk in Manhattan, you can spend $9.64 for a 32-ounce carton to be brought to your door within an hour. If you can make it to a hypermarket in New Jersey, you can get twice that amount for $3.72.

Minority shareholders in Japanese convenience chain Lawson should reflect on that before going along with Mitsubishi Corp.'s plan to spend 144 billion yen ($1.4 billion) to take control of their business. Lawson has already agreed to back the offer of 8,650 yen a share to lift Mitsubishi's current one-third holding to 50 percent. Savvy investors should ask for more.

Making a bid for control looks opportunistic. Local markets are febrile ahead of a Bank of Japan meeting next week, where Governor Haruhiko Kuroda has promised to reveal the results of a policy review. Lawson shares plunged to their lowest in nearly two years on Sept. 1.

Buyer's Market

Deal premiums in Japanese M&A transactions tend to fall short of those in other parts of the world

Source: Bloomberg

Companies in Japan don't tend to change hands for the sort of premiums common elsewhere, but Mitsubishi's offer is a scant 15 percent increase on the stock's 7,508 yen volume-weighted average price in the month before the Nikkei Daily broke news of the transaction on Sept. 15. It's just 4.5 percent above Lawson's six-month volume-weighted average price of 8,277 yen.

There's an argument to be made that Mitsubishi would just be putting Lawson out of its misery. Convenience stores in Japan expanded in the 1970s, 1980s and 1990s on the back of a demographic that's vanishing -- the harried salaryman grabbing a snack, hot meal or spare shirt on the way home from a 12-hour day at the office. But while the country's male workforce peaked way back in 1997, female employment continues to grow, reaching a record 28.3 million in July. The population of retirees -- who might prefer to shop for essentials at a friendly neighborhood place within easy walking distance -- numbered 34.4 million at the end of last year, up 17 percent since 2010.

New Lease of Life

Lawson's pace of net income growth is set to rebound into positive territory this year

Source: Analyst estimates, Bloomberg

Indeed, analysts forecast robust growth for all of Japan's major convenience-store owners over the coming years as they roll out products to suit these shifts. Lawson, FamilyMart and market leader Seven & i, which operates 7-Eleven outlets, are adding canes, reading glasses, and in-store pharmacies to cater to older shoppers, and fresh food and organic produce for women, according to Bloomberg Intelligence analyst Thomas Jastrzab.

Trading Places

Lawson had the most Japan-focused store network of its peers at the end of fiscal 2016

Source: Bloomberg

Lawson has trailed those two in opening overseas stores to escape a saturated home market. But given the doubling of its international network over the past four years and robust free cash flow of about 70 billion yen a year, it's a matter of opinion whether that's a permanent disadvantage, or opportunity for improvement.

Consumed With Desire

Mitsubishi Corp. used to be a commodities company. Now it makes more money from consumer goods

Source: Bloomberg

Mitsubishi's investments in commodities have resulted in multi-billion-yen losses, and it's keen to move toward a more consumer-focused model. Lawson would be a big help on that front. By taking a 50 percent share, Mitsubishi would be able to consolidate all of the chain's net income as its own, rather than the third currently permitted under equity-method accounting.

Putting on Weight

Turning Lawson into a subsidiary of Mitsubishi would increase its share of Mitsubishi's net income

Source: Bloomberg, Gadfly calculations

Note: Up to FY2016, Mitsubishi's share of Lawson's net income is counted as 33.5% of Lawson's total profits in line with equity-method accounting. Afterward, it's assumed to be 100% since the business would move to consolidation-method accounting.

It's not offering a lot for that privilege. At the 8,650 yen-a-share tender price, Mitsubishi would take control of Lawson at 23 times forecast current-year earnings. That's a lower valuation than the 28 times multiple FamilyMart shareholders pay just to own ordinary stock, let alone the 31 times multiple Canada's Alimentation Couche-Tard agreed to pay for U.S. convenience store and gas station chain CST Brands last month.

Lawson's minority shareholders should reflect on the fact that, like any good convenience store, they're lucky enough to be in the right place at the right time. At present, they've got something Mitsubishi badly wants. That ought to command more of a premium than what's on offer.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    David Fickling in Sydney at

    To contact the editor responsible for this story:
    Katrina Nicholas at

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