Seven & I Holdings Co, Asia's biggest retailer by market value, said on Monday it will take over Japanese department store group Millennium Retailing Inc in a deal worth as much as $2.15 billion.
Seven & I, a holding company that includes the Ito-Yokado supermarket chain and Seven-Eleven Japan convenience stores, aims to become globally competitive through the deal, which will push it past Aeon Co and make it Asia's top retail group by sales.
The company, which also has US-based 7-Eleven Inc under its umbrella, aims to jump-start its growth with department stores that have been benefiting from improvement in Japan's economy, while the outlook for general merchandise and convenience stores remains gloomy due to market saturation.
Seven & I's move also coincides with foreign rivals' attempts to gain further footholds in Japan's already crowded retail sector.
Competition in the industry intensified this month when Wal-Mart Stores Inc, the world's largest retailer, took a controlling stake in Seiyu Ltd, the country's fourth-biggest supermarket chain.
"As we value what each one of us have, we want to create a new (retailing) model through our merger," Seven & I Chairman Toshifumi Suzuki told a news conference.
Suzuki said he had high hopes for Millennium President Shigeaki Wada's skill in differentiating his company from other department stores, which he said was needed to win in a saturated retail market. Wada will become Seven & I's vice president in May.
Seven & I said it would pay 131.1 billion yen ($1.13 billion) in cash for a 65.45 percent stake in privately held Millennium from Nomura Principal Finance, a unit of Nomura Holdings Inc, in January.
It plans to acquire the remaining shares with cash or stock by next June to make Millennium, the parent company of Japan's Seibu and Sogo department stores, a wholly owned unit.
Nomura Principal, which bought the Millennium stake for 50 billion yen, said the sale would produce a profit of 81.1 billion yen, its biggest-ever profit from an investment. Its parent, Nomura Holdings, does not provide earnings forecasts.
Seven & I, a holding company created last September, has lacked major department store operations.
"Judging from the acquisition price and possible synergies in the consumer finance business and others, we view this merger positively at this point," Toshio Takahashi, an analyst at Mizuho Securities, said in a report.
Millennium, which has a total of 30 department stores, expects sales of 935 billion yen in the current year to February. That would bring total expected sales at the combined entity to 4.6 trillion yen, 5 percent more than Aeon in 2005/06.
After buying 50 million Millennium shares from Nomura at 2,622 yen per share, Seven & I will pay the same amount to buy the remaining shares from Millennium shareholders who accept its offer. This would make the takeover value about 200 billion yen ($1.72 billion).
However, if no shareholders except Nomura agree to its cash offer, Seven & I will swap each Millennium share for 0.61 share in the holding company. In this case, up to 24.181 million Seven & I shares will be needed to acquire the remaining 34.55 percent stake in Millennium, Seven & I said.
That would bring the total cost of the takeover to nearly 250 billion yen ($2.15 billion), based on Seven & I's closing share price on Monday.
Following the announcement, Standard & Poor's Ratings Services placed its ratings on Seven & I's subsidiaries on credit watch with negative implications, citing debt at Millennium, which was formed in 2003 after Seibu combined with failed Sogo.
"The acquisition cost and Millennium Retailing's debt burden are likely to put financial stress on the Seven & I Holdings group causing deterioration in its capital structure, while less-profitable department stores will become a larger part of its business composition," analyst Machiko Amano said in a report.
"As a result, Seven & I Holdings group companies may not be able to maintain the financial profile and profitability consistent with current ratings," she said.
Data showed on Monday that nation-wide department store sales rose 3.2 percent in November, a third consecutive month-on-month gain, on strong sales of winter clothing. Supermarket store sales fell 0.4 percent for a 21st straight month of decline.