7-Eleven, Inc. — Moody's places 7-Eleven's Baa1 issuer rating on review for downgrade
Rating Action: Moody’s places 7-Eleven’s Baa1 issuer rating on review for downgrade
Global Credit Research – 04 Aug 2020
New York, August 04, 2020 — Moody’s Investors Service, (“Moody’s”) placed 7-Eleven Inc.’s (SEI) Baa1 issuer rating on review for downgrade following the announcement[1] that the company has entered into an agreement to acquire Speedway, the convenience store/fuel retail operations of Marathon Petroleum Corporation (Baa2 negative). At the same time, Moody’s affirmed the company’s Prime-1 short-term commercial paper rating.
“We view this strategic acquisition positively as it adds high quality retail locations in many attractive markets and clearly positions SEI as the largest convenience store operator in North America. However, the review for downgrade reflects our expectations for a material increase in leverage to complete the approximately $21 billion acquisition”, stated Pete Trombetta, Moody’s convenience store analyst. The transaction price reflects the attractiveness of the Speedway business — about a 10.5x EBITDA multiple assuming the high end $575 million synergies are achieved or 7.1x assuming synergies as well as $3 billion of tax benefits to be recognized over 15 years and $5 billion of net sale leaseback proceeds. The transaction will be paid for primarily through debt and an equity infusion from Seven & i Holdings Co., Ltd. (A2 negative, “Seven & I”) and is subject to customary approvals and is expected to close in Q1 2021.
The acquisition of Speedway will make SEI the largest fuel retailer/convenience store operator in the United States and Canada with approximately 14,000 stores, which is about 4,000 stores more than its next largest competitor, Alimentation Couche-Tard Inc. (Baa2 stable). The acquisition will bolster 7-Eleven’s presence in several key US markets including the Northeast, Midwest, Florida and California.
On Review for Downgrade: ..Issuer: 7-Eleven, Inc.
…. Issuer Rating, Placed on Review for Downgrade, currently Baa1
Affirmations:
..Issuer: 7-Eleven, Inc.
….Commercial Paper, Affirmed P-1
Outlook Actions:
..Issuer: 7-Eleven, Inc.
….Outlook, Changed To Rating Under Review From Stable
RATINGS RATIONALE/FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The review will focus on SEI’s ultimate capital structure, the company’s ability to achieve its stated synergies, and its ability to reduce leverage to below the 3.75x threshold following the close of the transaction. The review will also focus on any potential location closings as well as the regulatory hurdles the transaction needs to clear in order to close.
The Prime-1 commercial paper rating recognizes the company’s very good liquidity, as well as continued tangible support from its parent. We also consider 7-Eleven’s acquisition-based growth strategy, with the proposed purchase of around 3,900 Speedway stores for approximately $21 billion the largest in the company history. This transaction is occurring less than three years after the acquisition of 1,030 Sunoco stores for around $3.1 billion.
The level of parental support from its Japanese parent Seven-Eleven Japan Co., LTD (“SEJ”) and its ultimate parent, Seven & I, is significant, led by the planned $8 billion equity infusion to effectuate the Speedway acquisition, the guaranty of the commercial paper program and the $900 million loan to finance the Sunoco purchase. Other examples include the conversion of $300 million in convertible subordinated debt to equity in 2010 and the purchase of the Japanese trademark in 2011, which continue to bear mention as they are two concrete examples of the continued strong support of 7-Eleven. Additional evidence of this support is the election of 7-Eleven’s CEO to the Board of Directors of Seven & I. 7-Eleven’s increasing emphasis on private label brands, and rapid pace of expansion continue to drive operating profit growth. The Prime-1 commercial paper rating reflects the unconditional guaranty of the entire program by SEJ, which is 100% owned by Seven & I.
Prior to the review for downgrade, the factors for an upgrade/downgrade were as follows: Ratings could be upgraded if Sunoco is integrated smoothly and operating performance continues to improve such that debt/EBITDA was sustained below 2.5 times and EBITA/interest expense was sustained above 4 times. An upgrade would also require the company’s financial policy to remain conservative, and would also require SEJ to continue to guaranty the company’s commercial paper program. Ratings could be downgraded if either via weakened operating performance, such as could occur if Sunoco stumbles, or a more aggressive financial policy resulted in credit metrics deteriorating such that Debt/EBITDA rose above 3.75 times, or EBITA/Interest fell below 3.25 times. Ratings could also be downgraded if there was a diminution in the level of support from SEJ.
Headquartered in Irving, Texas, 7-Eleven, Inc. operates, franchises or licenses over 50,000 convenience stores worldwide, with an additional approximately 21,000 operated in Japan by the parent under the 7-Eleven name. The company is wholly-owned by Seven & i Holdings Co., Ltd. (“Seven & I”) through its subsidiary Seven-Eleven Japan Co., Ltd (“SEJ”). Revenues for the last 12 months ended March 31, 2020 were approximately $25 billion.
The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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REFERENCES/CITATIONS
[1] 7-Eleven, Inc. Transforms its U.S. Store Network Through Acquisition of Speedway, 7-Eleven Media Website, https://corp.7-eleven.com/corp-press-releases/08-02-2020-7-eleven-inc-transforms-its-u-s-store-network-through-acquisition-of-speedway, 02-Aug-2020
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Peter Trombetta Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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