Seven & i Holdings under credit watch at S&P over massive share buyback plan

Investing.com -- S&P Global Ratings has placed Seven & i Holdings Co. Ltd., along with its subsidiaries Seven-Eleven Japan Co. Ltd., and 7-Eleven Inc., on CreditWatch with negative implications. This move follows the company’s announcement on March 6, 2025, of measures to enhance shareholder value, including a proposed initial public offering (IPO) for its North American convenience store subsidiary and share buybacks totaling ¥2 trillion.

The company’s shift towards a more shareholder-friendly approach, moving away from its traditionally conservative financial policies, has raised concerns over its creditworthiness. The company’s convenience store business, which is a significant contributor to its creditworthiness, has been recovering slowly. This shift in financial policy may slow the recovery of key cash flow metrics.

The company’s decision to allocate a significant portion of its cash from subsidiary transactions towards shareholder returns, including share buybacks, instead of growth investments and debt repayments, has been noted. It is estimated that the share buybacks will total ¥2 trillion by 2030, accounting for 40% of the company’s latest market capitalization of about ¥5 trillion.

The company’s convenience store business, which supports its creditworthiness, may continue to see declining profitability. Recovery of profits is expected to be slow due to increased competition in Japan’s mature retail market and the impact of inflation. The North American convenience store business, which contributes about 60% of overall EBITDA, is also expected to see a slow recovery due to inflation.

The company’s debt-to-EBITDA ratio for the nonfinancial unit is expected to have worsened to around 3.0x at the end of fiscal 2024 (ended Feb. 28, 2025), from 2.6x in fiscal 2023, due to the poor performance of the convenience store business. Given the challenging environment for both the North American and domestic convenience store businesses, their combined EBITDA (totaling approximately ¥1.0 trillion) is not expected to increase significantly over the next one to two years.

Over the next two to three months, S&P Global Ratings will review how Seven & i balances shareholder returns with financial conservatism. This will involve a close examination of the timing and scale of returns to shareholders, future growth measures for the convenience store business, financial policies, and the tolerance for debt.

Furthermore, the potential acquisition of Seven & i by Montreal-based convenience store operator Alimentation Couche-Tard Inc. (ACT) could put additional pressure on Seven & i’s creditworthiness. It is currently unclear how the acquisition would be funded if it were to proceed. If fully funded with debt, ACT’s post-acquisition debt to EBITDA could increase to more than 5x. Both companies had debt-to-EBITDA ratios of less than 3x for the most recent period. If the acquisition is completed, the competitiveness, capital structure, and financial soundness of the acquired company, as well as the management structure of the group, will be examined.

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