Alimentation Couche-Tard (ACT), the Canadian parent company of Circle K, previously proposed acquiring Seven & i Holdings, the Japanese parent company of 7-Eleven, at a price of US$14.86 per share, totaling nearly US$39 billion (equivalent to HK$304.2 billion). If these two retail giants merge, it will mark the largest acquisition of a Japanese company by a foreign entity in history. Post-merger, ACT would operate roughly 100,000 convenience stores worldwide. However, Seven & i has rejected ACT’s acquisition plan, citing an undervaluation of its corporate value.
Identifying Intangible Assets in the potential M&A
In light of News from Bloomberg, ACT is open to increasing the bid, if Seven & i Holdings engages in “friendly” negotiations. To gain a deeper insight into the intrinsic value of Seven & i Holdings, as a valuer, we can assess the worth of intangible assets that are not included in the financial statements. Our first step will involve identifying potential intangible assets based on the rationale for the acquisition. As per Alex Millar, the CEO of ACT, expressed “deep respect for Seven & i and the business they have built in Japan and around the world, including their great operating model, franchisee network and brand.” This suggests that the potential intangible assets which ACT is looking for in the transaction may include trademarks and the franchising agreement.
Apart from marketing-related intangible assets like trademarks and contract-based intangible assets like franchise agreements as mentioned, there are other potential intangible assets that may be involved in an acquisition such as patents and customer lists.
Franchising Business of the Acquiree – Seven & i Holdings
In the case of the Seven & i acquisition proposal, valuing the franchising business as a contract-based intangible asset is a pivotal aspect influencing the corporate value. Total sales across all convenience stores involves revenues from both directly managed and franchised stores operating under license. Royalty Fees made by franchisees for utilizing the brand and support provided by the franchisor. For convenience store management, it is permitted to use trademarks, other business symbols, and copyrighted materials. In these franchise agreements, revenue is recognized over the franchised period as gross profit on sales is generated, since the transaction prices are normally Royalty fee based on the gross profit on sales of the stores.
Conclusion
Accurate valuation of intangible assets is essential for promoting fair and transparent negotiations and understanding the acquiree’s intrinsic value to navigate integration effectively in M&A deals. By conducting thorough valuation of intangible assets, companies not only optimize its corporate value, but also facilitate fair value assessments of all assets and liabilities in Purchase Price Allocation (PPA) exercise that adheres to accounting standards after the merger.