SANTA MONICA, Calif. & TOKYO, Japan – Dalton Investments issued the following letter to the directors of Seven & i Holdings Co., Ltd. (3382.T) regarding the proposal for a 100% tax-free spin-off of 7-Eleven global convenience store business.
The Board of Directors
Seven & i Holdings Co., Ltd.
8-8, Nibancho, Chiyoda-ku, Tokyo 102-8452, Japan
January 2023
Dear Board of Directors,
Dalton Investments (“we”) are institutional investors who intend to hold your company’s stock long-term. After years of research, interviews, and discussions, we developed confidence in the management team’s disciplined capital allocation and business portfolio management. We came to own your shares in 2021. In November last year, we had a constructive dialogue with Mr. Ito, a board of directors member, executive officers, and other investor relations team members.
Today, we would like to share our thoughts on the proposal made by ValueAct Capital, another shareholder of your company. We believe ValueAct Capital’s proposal for a 100% tax-free spin-off of the 7-Eleven global convenience store business will enhance your corporate value.
First, we believe that the spin-off will contribute to eliminating the discount on your company’s stock price. Based on our sum-of-the-parts analysis, we think your company is worth at least 8,900 yen per share. Your stock price is undervalued. The market does not appreciate complex company structures and has attached a discount to intrinsic value. The stock price also reflects the market’s concern around inefficient capital allocation by management, which we consider an agency cost. We believe that this spin-off will contribute to eliminating the discount by focusing on the most valuable business within your group companies and allocating the appropriate amount of capital between businesses.
Second, we emphasize the essential benefit of spin-offs, where the company itself looks to enhance corporate value. The new management team of the spun-off company can focus on the business it manages and quickly make optimal capital allocation and other decisive decisions. In addition, it is typical for the management team to hold a significant stake in the target company at the time of the spin-off, which enhances ownership and encourages an entrepreneurial spirit. There are many cases in the U.S. where companies revitalized themselves after being spun off from a conglomerate group.
If we limit our perspective to that of the holding company’s “management team,” we understand that spin-offs can feel like the loss of a good business without compensation. Spinning off a good company that generates ample cash flow is a very courageous decision. We trust the board to make the right decision in a difficult issue, based on the successful choices you have made in the past and our experience in talking with the management team.
Finally, despite the remarkable progress in corporate governance in Japan over the past decade, improvements in capital efficiency across all listed companies in Japan still need to be improved. While ample capital is one of Japan’s strengths, the continued low level of returns represents a significant opportunity loss to Japanese society. As an equity investor committed to the Japanese market for over multiple decades, we sincerely hope that your company’s decisive actions will serve as a role model and thought leadership to other Japanese companies. Your spin-off will be a symbolic event in the history of the Japanese economy. We trust other courageous management and subsequent companies will follow your decision as a role model.
As a shareholder, I am writing to you to support your decision. If you have any questions, don’t hesitate to contact any member of our Tokyo office.
Sincerely yours,
James B. Rosenwald III
Co-Founder and Chief Investment Officer
Dalton Investments
Please note that the above is an English translation of the below letter that Dalton Investments sent in Japanese, provided as a courtesy. In the event of any inconsistency between the English language version and the Japanese language version, the meaning of the Japanese language version shall prevail.
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