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Retail

7-Eleven parent to cut stake in home goods chain to focus on core

Japanese group makes first reversal of post-2000s diversification strategy

Home decor chain Francfranc turned in record earnings last fiscal year after closing stores.(Photo by Keigo Yoshida)

TOKYO -- The Japanese retail group behind 7-Eleven has decided to sell off part of its stake in Tokyo-based home decor chain Francfranc so it can concentrate on its mainstay convenience stores.

The move represents a change for Seven & i Holdings, which has never divested shares of a group company since embarking on a diversification strategy in the 2000s. Potential buyers include Tokyo-based investment funds Integral and the Japan Growth Investments Alliance, with the transaction expected to be completed as soon as July.

Long-suffering Francfranc has not been the right fit for Seven & i, which has faced shareholder pressure to spin off some operations.

Japan's biggest retail group by net profit first bought a 49% stake in the design-oriented chain of Main Street stores in 2013 for nearly 4 billion yen ($36 million at current rates), back when Francfranc ran into financial trouble.

Seven & i took a hands-on approach, with such steps as selling the housewares at its supermarkets and department stores. But the added value the parent had anticipated never materialized.

A recovery in Francfranc's earnings created an opportunity for Seven & i to pare down its investment. Thanks to closures of unprofitable stores and other cutbacks, Francfranc earned an operating profit of 3.7 billion yen in the year ended last August -- a record level roughly 12 times the year-earlier result. A sale now would be expected to fetch two to three times the price per share that Seven & i paid in 2013.

Francfranc's founding family, which owns the remaining 51% stake, will sell a portion of its shares to an investment group as well. The plan is for Seven & i and the family to hold no more than a 49% combined interest in the chain.

Francfranc looks to hire fresh talent and relist on the stock market to increase its fundraising options. Seven & i will negotiate with the buyer to make sure its remaining stake does not fall below 20%, the threshold for maintaining equity-method ties, at least until the unit goes public.

Seven & i has long used earnings from its powerful convenience store business to fuel forays into new areas of retail. In 2006, it entered the department store sphere by buying Millennium Retailing, now called Sogo & Seibu. It is also invested in Tower Records Japan, apparel shop Barneys Japan and baby and maternity goods store Akachan Honpo.

But as the coronavirus forced stores to cut hours, the return on assets for its department store business limped along at a negative 2% in the fiscal year to February, while the even weaker specialty store segment logged a negative 9%.

Those figures pale alongside the domestic convenience stores' ROA of 18.7% and even the 4.3% of overseas convenience stores, which have required upfront investment.

Shareholders have made clear they want the company to focus on its mainstay convenience stores, a market in which Seven & i holds the top share in Japan. In May, Reuters reported that San Francisco-based activist investor ValueAct Capital had amassed a $1.53 billion stake in Seven & i and had suggested a potential break-up.

"The hedge fund said the 7-Eleven business could be worth more than double what its parent is currently valued at if the company restructures itself to focus on the convenience stores or if 7-Eleven is spun out," Reuters reported a letter to investors as saying.

When Seven & i purchased thousands of Speedway gas stations and convenience stores in the U.S. in May, the $21 billion acquisition was done entirely with borrowed money. The company has been shuttering low-performing department stores and supermarkets, but it needs to accelerate its structural reforms.

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