FamilyMart Inks $1.9 Billion Don Quijote Deal in Growth Race

(Bloomberg) -- FamilyMart UNY Holdings Co., Japan’s second-largest convenience-store operator, will acquire a stake in discounter Don Quijote Holdings Co. in a deal valued at 212 billion yen ($1.9 billion), the company announced Thursday.

Don Quijote will become the fourth-largest retailer in Japan by sales after it buys a remaining 60 percent stake in FamilyMart unit Uny that it doesn’t already own for 28.2 billion yen. The unit operates a chain of general merchandising stores and will become a wholly-owned subsidiary of Don Quijote.

FamilyMart will offer 6,600 yen per share for the Don Quijote stake, a 19 percent premium over Tuesday’s closing price, before speculation on the deal surfaced.

Key Insights

  • Japan’s saturated convenience-store market has been squeezed by tough competition between three top operators seeking new ways to grow.
  • The deal will keep Uny under the FamilyMart umbrella and gives the convenience-store owner a stake in Don Quijote, a retailer respected for posting double-digit growth figures and succeeding in Japan’s tough retail environment.
  • The announcement deepens a partnership between the two companies. Don Quijote took a 40 percent stake in FamilyMart’s Uny in 2017, allowing it to operate some of its stores under a joint brand. The two companies are also cooperating on product development and distribution.

Market Reaction

  • Don Quijote rises as much as 8.1 percent to 6,540 yen, the highest since 1998
  • Don Quijote shares jumped 9.4 percent Wednesday on reports of the deal
  • FamilyMart drops as much as 6 percent. Shares gained 5 percent to a record high on Wednesday
  • Benchmark Topix index drops as much as 3.9 percent

Deep Dive
  • Don Quijote will become the fourth-largest retailer in Japan by sales when it takes control of Uny, after Aeon Co., Seven & i Holdings Co., and Fast Retailing Co. based on last fiscal year results.
  • Deal benefits Don Quijote the most, says Jefferies analyst Mike Allen says in phone interview. “They’re paying almost nothing for Uny,” he says.
  • FamilyMart, in statement, says it chose to partner with Don Quijote as the two don’t compete for the same retail shoppers. Company also cites an increasingly difficult business environment in Japan and changing consumer needs that require more efficient logistics and better product development.
  • The move also brings Don Quijote closer to Itochu Corp., one of Japan’s largest trading companies. Earlier this year Itochu increased its stake in FamilyMart to take majority ownership.