Creditors at Odds with Shareholders Over Seven & i Mega-Deal

(Bloomberg) -- The debt market is showing concern about Seven & i Holdings Co.’s $21 billion deal to buy Marathon Petroleum Corp.’s gas-station business, even as equity investors grew more positive on the purchase.

The credit rating of the world’s largest convenience store operator was cut by Moody’s Investors Service from A1 to A2, the sixth-highest level, citing “an expected spike in leverage” after the Japanese company’s biggest planned acquisition. Other rating firms have also put the retailer’s credit scores under review for potential downgrade, and its yen bonds fell slightly on Monday. The notes were little changed on Tuesday.

The stock of the 7-Eleven franchise operator jumped 8.9% Tuesday after initially dropping 4.8% on Monday.

For share investors, the acquisition of Speedway gas stations may be an encouraging sign that the retailer is aggressively pursuing global growth at a time when the population is shrinking at home. The bond market, on the other hand, is raising questions about what the price tag would mean for the company’s relatively strong credit ratings.

If Seven & i funds the deal entirely with debt as expected, its borrowings will increase by over 70% while its earnings before interest, taxes, depreciation and amortization will gain by only about 15%, according to Moody’s. That means the ratio of its debt to EBITDA may rise to around 4.2 to 4.3 times, from 2.8 times in the fiscal year ended February.

Overseas Risk

There are also significant risks for the Japanese company in integrating the overseas acquisition because of the difference in business models and lower margins, Moody’s said. Seven & i’s domestic department store operations are also challenged by an accelerating shift to online shopping.

The prospect that Seven & i’s debt ratings will remain relatively high even if they are cut is making some investors interested in its bonds, especially if spreads widen. The firm has an AA- rating from S&P Global Ratings, AA from Rating & Investment Information Inc. and AA+ from Japan Credit Rating Agency Ltd.

“When it carries the possibility of a downgrade, the company will likely provide good returns when issuing bonds so it may not be a bad deal for debt investors,” said Masayuki Tsujino, a senior fund manager at Asahi Life Asset Management Co. “I don’t hold Seven & i now as its spread is tight, but I would consider buying if its spread widens.”

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