*

Seven & i ( SVNDF ) has rejected $38.5 bln offer, but Couche-Tard

says

still interested

*

Some Japanese 7-Eleven franchise owners cite concerns

about

missteps

*

Seven & i ( SVNDF ) says working with franchisees on growth

(Adds detail about owners in paragraphs 15 and royalties in

paragraph 19)

By Maki Shiraki

TOKYO, Sept 26 (Reuters) - As much as Jun Nagao doesn't

like the idea of foreigners scooping up Japanese companies, the

former 7-Eleven franchise owner thinks a takeover would bring

welcome change to the retail giant where he spent decades.

Nagao, who until last year owned a 7-Eleven convenience

store in Gunma, north of Tokyo, says years of strategic missteps

left parent Seven & i Holdings ( SVNDF ) ripe for a $38.5 billion

bid from Canada's Alimentation Couche-Tard ( ANCTF ) last month.

He is not alone in his criticism. Reuters also spoke to nine

current 7-Eleven franchisees in Japan, almost all of whom voiced

disapproval of Seven & i's ( SVNDF ) strategy and welcomed the proposed

buyout by Circle K owner Couche-Tard.

While Seven & i ( SVNDF ) has rejected the bid, Couche-Tard has said

it remains interested. The deal would be the biggest-ever

foreign acquisition of a Japanese company and would boost the

Canadian retailer's economies of scale.

The franchisees were almost unanimous in some of their

complaints, including about the high-profile failure of a

cashless payment system, 7pay. Many voiced concern about

competition from rivals and said they struggled with rising

costs as Japan exits deflation for the first time in decades.

"As a Japanese, I don't think having companies bought out by

foreign firms is good in principle," said Nagao, who battled

with headquarters for years until he agreed to part ways with

the company. He was among a group of owners who lost a 2013

court fight to shorten mandatory 24-hour business hours because

of tight staffing.

"The current management failed to create value... otherwise,

this sort of thing wouldn't have happened."

Seven & i ( SVNDF ) has been a market laggard. In the five years to

mid-August, just before the bid was unveiled, its shares rose

60% including dividends while the benchmark Nikkei index

more than doubled.

Japan and the U.S. account for around two-fifths of the

85,000 7-Eleven stores worldwide. The Japan business is smaller

by sales, but highly profitable, with operating margins of 27%

versus an average of 3.5% outside the country.

In Japan, 7-Eleven's average daily sales per store exceed

those of main competitors Lawson and FamilyMart, although sales

at both rivals are growing.

Owners are key to Seven & i's ( SVNDF ) lucrative domestic convenience

store business and some are also shareholders. Some of the

owners' comments to Reuters show issues previously raised by

U.S. activist fund ValueAct Capital and other investors about

7pay and the need for a governance overhaul are shared by other

stakeholders.

To be sure, the owners Reuters interviewed are not a

comprehensive sample of the more than 21,000 franchised stores

in Japan. Seven & i ( SVNDF ) does not disclose the number of owners, and

almost all of those who spoke to Reuters declined to be

identified in order to speak openly.

In response to questions from Reuters, Seven & i ( SVNDF ) said

through support measures for 7-Eleven stores and communication

with owners it was "constantly striving" towards sustainable

growth and creating a "safe and secure management environment".

It would continue to work closely with franchisees to grow

together, it added.

'WAKE-UP CALL'

Many owners do appear to support management. The company has

heard from around 40 to 50 owners expressing concern about the

potential buyout and what would happen to their stores, a

spokesperson said.

According to an internal Seven & i ( SVNDF ) annual survey of

franchisees obtained by Reuters, for the last three years around

80% said they were either "somewhat satisfied", "satisfied" or

"extremely satisfied" with management overall.

Details from the anonymous survey have not been previously

made public.

In the majority of franchise agreements in Japan, Seven & i ( SVNDF )

arranges the real estate and the store construction and owners

return between 56% and 76% of profits as royalties.

Some owners told Reuters their royalties were not being put

to good use, but the company said the funds were used to develop

and pay for store equipment, such as freezer cases.

The 7pay cashless service was shut down just three months

after its 2019 launch. It was hacked days after it went live and

money was later confirmed missing from some 800 user accounts.

Last year, Seven & i ( SVNDF ) shut down its eight-year-old online

shopping site after it failed to gain traction.

"I think they could make another big mistake again," one

owner in the greater Tokyo area said.

By rejecting Couche-Tard's bid as too low, Seven & i ( SVNDF ) now

needs to create value, Tak Niinami, CEO of Suntory Holdings and

the former head of 7-Eleven rival Lawson, said in a recent

interview.

"The Couche-Tard proposal could be a wake-up call for Seven

& i ( SVNDF )," he said.

'NO COMPLAINTS'

Shigeo Kasai, the only owner who agreed to be named, said he

had no complaints about management or the three stores he

operates in Tokushima prefecture, where he said sales were

growing.

But he saw a potential benefit from foreign ownership, as a

catalyst to fresh ideas and ways of doing things.

Japan's declining population made it more difficult for

convenience store operators to grow. That has likely weighed on

owners, said Shun Tanaka, a senior analyst at SBI Securities.

Same-store sales at 7-Eleven in Japan were flat in the three

months to May. In the last financial year they rose 3%.

One owner in the western Kansai region said the company ran

a promotion focused on regional specialties for so long that

customers tired of it. When the deal finally ended, there was no

replacement to generate consumer buzz.

One owner in greater Tokyo said no matter what happens with

Couche-Tard, ownership will eventually change. Before the

Canadian company made its approach, the owner had assumed some

other retailing heavyweight could swoop in.

"Even if Couche-Tard's takeover bid fails, I think another

company will come along to buy it."

($1 = 141.5800 yen)