TheChek News Flow

Ireland’s luxury problem: what to do with its €8.6bn surplus

Some economists see a ‘once-in-a-generation’ chance for public investment, but Dublin says it must save for the future

Officials preparing Ireland’s upcoming budget face a situation most of their peers elsewhere would love to have: an €8.6bn surplus and an economy that grew five times faster than expected last year.

But deciding what to do with the country’s tremendous fortune is proving trickier than anticipated.

“Ireland’s problem isn’t that it doesn’t have enough money — it has loads,” said Gerard Brady, chief economist at Ibec, Ireland’s biggest business lobby. “The problem is that it is struggling to find ways to turn that money into real things that people need.”

More than a decade on from a crash that required the EU and IMF to step in with €67.5bn in loans and impose a controversial austerity programme, the government remains cautious and stresses it is saving prudently for future pension, climate and infrastructure challenges.

But some economists believe failing to deploy its tremendous fortune misses an opportunity to fix infrastructure problems that risk strangling Ireland’s boom.

“There is an overwhelming need for public investment and a once-in-a-generation opportunity to finance that from your back pocket,” said economist David McWilliams.

There are many areas where the money could be well spent — from tackling a housing crisis in a country where population growth is fast outstripping new supply, to alleviating electricity grid, water supply, health service and public transport challenges. “Rarely has a country been given such an extraordinary opportunity to change society and been advised not to do it,” McWilliams said.

The country is on course for a bumper surplus for the third consecutive year in 2024, after being €8.3bn in the black last year and €8.6bn in 2022, according to official data.

Surging corporation tax receipts from Irish-based global companies, mostly in tech and pharmaceuticals, are behind the overflowing government coffers.

The government says corporation tax receipts, which brought in €23.8bn in 2023 and are forecast to raise €24.5bn this year, are volatile, temporary and unlikely to keep expanding at their recent pace.

It estimates half its corporate tax haul could be “windfall”, or temporary, in nature and has opted to put more than €100bn of the surplus in two sovereign wealth funds by 2035 to address future pension, climate and infrastructure challenges.

The government has slashed its budget surplus forecast for the years ahead — it had predicted €65bn for 2023-26 — but is still expecting a total of €38bn for 2024-2027.

Outside of the big tax haul, Ireland’s economy is performing strongly.

Ireland’s GDP figures are distorted by its oversized multinational sector, but modified domestic demand, the government’s preferred measure of growth, rose 2.6 per cent last year. That compared with a previous official estimate of 0.5 per cent for 2023.

With the economy running close to full employment and with annual inflation having surged as high as 9.2 per cent as recently as 2022, the government has vowed to spend carefully for fear of overheating — despite price pressures now falling back to 1.1 per cent.

But Dermot O’Leary, chief economist at brokerage Goodbody, said there was evidence of “spending creep”.

“The government has been talking a good game in relation to the need for prudence, the move to set up these savings funds. Yet the actual reality has been significantly less prudent in terms of spending growth,” he said.

Dublin has used some of the money for debt repayment, lowering its debt-to-GNI ratio to just under 76 per cent, and to fund Covid-19 measures and cost of living support.

But with a general election due by 2025, expectations of a giveaway budget on October 1 are mounting.

“An embarrassment of riches is difficult for ministers to manage, particularly this side of an election. So certainly politics is coming into it,” O’Leary said.

So far, the government has said the budget will include €6.9bn in spending and €1.4bn in tax measures — moves it admits will breach its self-imposed rule of increasing spending by no more than 5 per cent a year.

Emma Howard, a lecturer at the Technological University Dublin, said Ireland should use some of its surplus cash to “look beyond the macro to societal problems”.

Ireland ranks as the loneliest country in Europe, with almost a fifth of people lonely most or all of the time and nearly two-thirds of people suffer from anxiety or depression, according to EU data. One in seven children live in homes below the poverty line, defined as 60 per cent of the median disposable household income.

“There is money we could spend right now that could improve some social issues. We should be looking at that, because we can afford it,” she said.

McWilliams said Ireland should use its surpluses to create start-up funds to foster entrepreneurialism. “It’s a failure of imagination,” he said.

Others say Ireland could enhance its 5.3mn citizens’ wellbeing and the country’s economy by improving a planning system that can hold up infrastructure developments for years.

The government is seeking to legislate to reform the system, including setting deadlines for planning decisions.

Housebuilding is finally accelerating, but remains well short of projected need. A new national children’s hospital, now set to cost €2.24bn, is way behind schedule and four times over its initial budget. It is unlikely to open until next year at the earliest.

“We could . . . deliver more with the resources we have — so money isn’t everything,” said John Fitzgerald, an economist and adjunct professor at Trinity College Dublin.

Whatever Ireland does with it, the money looks likely to keep coming.

Under one part of a two-pillar OECD tax reform plan, intended to remove advantages for multinationals doing business in low-tax jurisdictions, Ireland has increased its 12.5 per cent corporate tax rate to 15 per cent for large companies.

But the other part — a requirement for corporations to pay tax where their customers are located, which would funnel away some of Ireland’s corporate tax receipts — is effectively dead. 

“We are in a very, very strong position at the moment,” Seamus Coffey, chair of the Irish Fiscal Advisory Council, told a recent conference. “The hope is that we don’t make a mess of it.”

Fears of rise in UK capital gains tax trigger selling ‘frenzy’

Wealth managers report upswing in activity as investors position themselves ahead of October Budget

Fears that the UK government will raise capital gains tax in its October Budget are driving a “frenzy” of activity by business owners, property investors and shareholders, according to wealth managers and tax experts.

Earlier this week Sir Keir Starmer gave the strongest signal yet that the Labour administration will raise taxes to close a £22bn “black hole” in the public finances at the October 30 budget.

“There’s a Budget coming in October and it’s going to be painful,” Starmer said in a speech on Tuesday. “Those with the broadest shoulders should bear the heavier burden.”

Several advisers said their asset-owning clients were worried about potential increases in capital gains tax — particularly as Labour ruled out raising national insurance, income tax or VAT in the run-up to July’s general election.

“It is a frenzy”, said Tim Stovold, partner at Moore Kingston Smith, an accountancy firm, who reported inquiries about selling assets, due to worries about tax rises, had rocketed since the election.

Capital gains on assets including businesses, second homes and shares are currently taxed at between 10 and 28 per cent — lower than the 20 to 45 per cent levied on income.

Miles Dean, partner and head of international tax at Andersen, said his clients with real estate, company shares and crypto assets — had been pushing to sell them and pay tax at the existing rates for at least 18 months — “ever since it became clear that Labour were going to get into power”.

Nimesh Shah, chief executive at advisory firm Blick Rothenberg, said the prime minister’s statement had prompted a “significant number of queries in the last 24 hours”.

Several clients who own businesses were pushing “through business sale transactions way in advance of when they would have, with an urgency to complete”, added Ian Cook, financial planner at Quilter Cheviot. Share portfolio investors were making use of the ability to sell shares and rebuy them in what is known as “bed and breakfasting”.

Cook said he also knew of a number of property investors who were in the “throes of liquidating property portfolios”. Most of them had started selling down their assets as soon as the new government was confirmed. Investment properties owners who had not yet started selling would find it difficult to complete before the October Budget, Cook warned.

“For both property owners and entrepreneurs, there’s a lead time. You don’t put it on eBay and then it’s gone in a week,” he said.

Advisers reported that as well as selling to external buyers, clients were disposing of assets in other ways such as selling into family trusts or gifting assets to younger generations. The latter mechanism was also being used by people concerned there would be changes to the inheritance tax system, such as a capping or scrapping of certain tax reliefs.

Clare Munro, a tax adviser at Weatherbys Private Bank, said there had “definitely been some concern” from clients about both potential capital gains tax and inheritance tax changes and this had led some to take action.

However, she warned that there were risks around making short-term selling decisions, including any rumoured tax changes not coming to fruition or losing out on potential growth from hold assets over the long term.

Stovold agreed that some people were “losing their common sense” and looking at accelerating sales of assets that they had intended to hold for at least the next 10 years. He added that there would be tax raising benefits for the government of letting the CGT “rumours run rife”.

Overall the uncertainty was unhelpful for businesses and their owners, said Mike Hodges, partner at accountancy firm Saffery.

“Causing people to act in haste doesn’t feel like the best way to create the confidence and stability around the tax system that will encourage people to invest,” he said. “With two months still to go until the Budget, we don’t want to encourage a fire sale mentality.”

Private equity warns UK capital gains tax overhaul could be ‘tipping point’

Potential increase of capital gains tax comes on top of changes to non-dom and carried interest regimes

Private equity executives have warned radical action to overhaul the UK’s capital gains tax regime could prove pivotal in sparking an exodus of dealmakers from Britain.

Prime Minister Sir Keir Starmer’s speech on Tuesday, where he cautioned that those with “the broadest shoulders should bear the heavier burden”, sent jitters through the UK private equity industry.

The newly elected Labour government had already put the industry on notice with a consultation that closed on Friday about plans to change the tax treatment of carried interest, the performance fees that fund managers receive from asset sales.

Many private equity executives are also exposed to changes to the favourable “non-dom” status that allowed wealthy foreigners to avoid paying tax on their overseas income. 

One partner at a top-20 global private equity firm said: “If the government does something really strong [in the Budget next month] then that will be the tipping point where people accelerate plans to leave.”

A second executive at a leading private equity group added: “If things become significantly unattractive relative to other countries and you’re not from the UK, why would you stay?” 

Private equity executives have long benefited from an arrangement that means carried interest is taxed as a capital gain at a rate of 28 per cent, rather than the highest bracket of income tax, which is 45 per cent plus national insurance.

The industry has for months been preparing for Labour to tighten the regime. 

However, insiders viewed the Treasury’s one-month-long consultation as an aggressive move that signalled the government was not prepared to give detailed consideration to its proposals.

The timing of the consultation, which took place during August when many people were on holiday, suggested the government was “paying lip service” to the industry, one leading tax lawyer said. 

“This is a matter of principle for the government and it will primarily be a political decision,” he said.

The Treasury said: “Following the spending audit, the chancellor has been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy and address the £22bn hole in the public finances left by the last government.”

“We are committed to reforming the tax treatment of carried interest, delivering fairness in this area of the tax system while recognising the vital role that our world-leading asset management industry plays in channelling investment across the UK. We launched a call for evidence so that a wide range of stakeholders can provide their views as part of this.”

In March, one of London’s top private equity lawyers warned that Labour’s plans to raise the tax on carried interest could be more damaging to the capital’s status as a dealmaking centre than Brexit. 

The UK is the largest hub for private capital investment outside the US, with UK-managed funds accounting for just over half of the total private equity and venture capital raised in Europe in 2023, according to the British Private Equity and Venture Capital Association. 

While relatively few individuals directly benefit from the carried interest regime — around 3,000 people in the UK — many more jobs in banking, law and consulting depend on the private equity industry.

The industry has warned that aggressive fiscal tightening could harm Britain’s position as an asset management centre at a time when other jurisdictions are competing to lure top earners. France, Italy and Germany tax carried interest at 26-34 per cent. 

Many of the largest private equity firms in the UK are the European outposts of US operators, meaning their staff are often highly mobile with limited ties to Britain. KKR, Blackstone and Apollo Global Management all have their main European base in London.

“The American groups have got the loudest voice here,” said the first private equity partner. “Many of the people who are based in their European headquarters in London — French, German or Italian — have no loyalty to the UK at all” and some of them had already left since Brexit. 

Victoria Price, head of private capital at consultants Alvarez & Marsal, said six private capital professionals of her 80 individual clients were moving abroad because of expected tax changes.

Chancellor Rachel Reeves has previously suggested buyout executives who invest in their funds alongside their investors would continue to enjoy favourable treatment. 

Lobbyists have sought to ensure that borrowed money counts as so-called “skin in the game”. They have also warned the government not to adopt a retroactive approach to taxation and to avoid adopting complex new rules.

Several private equity executives said they expected an increase to capital gains tax of at least five percentage points, although they had not completely ruled out a bigger move to align capital gains more closely with income tax.

“No one will make different life decisions if the tax rate goes up by a couple of per cent,” said a third executive. “I hope and trust that the worries about this ceasing to be viewed in a commercial way . . . are not justified.”

Some executives at private equity firms in London expressed scepticism about a mass movement out of the UK regardless of changes to the tax regime. One partner at an international firm said, even if carried interest were taxed at 45 per cent, “it would be hard to beat the convenience of London”.

“Not much is going to change, no matter what,” they said.

New York business elite rally in favour of fashion merger

M&A titans may be signalling to Kamala Harris to lighten up on antitrust enforcement

The heavy hitters at the Partnership for New York City are perhaps not the target market for Coach and Michael Kors. But the two “accessible luxury” brands are suddenly of interest to the Manhattan-based non-profit civic group whose mission is to stand up for the Big Apple’s business interests, particularly Wall Street and commercial real estate.

Last week, PFNYC released a public letter it sent to the pair of US senators from New York as well as two senior members of the House of Representatives New York delegation asking them to denounce a lawsuit brought by the US Federal Trade Commission, the competition authority. The FTC is seeking to block two fashion companies, Tapestry and Capri, from combining. The combined company would boast such brands as Coach, Michael Kors and Kate Spade with an enterprise value exceeding $20bn. 

The FTC argues that consumers would be harmed if Coach and Kors, currently part of different companies, would no longer be competing against each other in the upper middle-class, “accessible luxury” handbag category. 

The New York angle is that both companies are based in the city and Joanne Crevoiserat, the chief executive of Tapestry, is an executive committee member of the PFNYC. The letter stated that the FTC action was “ideologically motivated” and a “clear case of regulatory over-reach”.

Outside groups sharing views on antitrust litigation is not unusual. But among the boldfaced names in PFNYC are top mergers and acquisitions bankers and lawyers whose multimillion-dollar bonuses depend on a thriving deals marketplace. Many of these Masters of the Universe are also Kamala Harris supporters or fundraisers including the likes of Blair Effron, Brad Karp and Rodgin Cohen.

Should Harris win the US presidential election, a question emerging is whether she will jettison FTC chair Lina Khan and the Department of Justice’s Jonathan Kanter, who have both aggressively litigated corporate consolidation and even tightened the so-called merger guidelines, their rubric used to evaluate deals. 

Wall Street and the C-suite have enormous influence in New York City politics. President Joe Biden has, to a surprising extent, kept corporate interests at arm’s length, a posture that some New Yorkers are undoubtedly looking to change in the next administration and the PFNYC intervention is a portent of that.

The PFNYC said the Tapestry/Capri merger would help prop up the New York fashion industry, which it says has faded in recent years, and that the US deserved a luxury national champion in the way Europe had LVMH. Tapestry additionally adds that the FTC’s definition of the handbag market is arbitrary and constrained (at one point it wondered if duffel bags and backpacks could count as a type of handbag).  

In an interview with the Financial Times, Kathryn Wylde, president and chief executive of the PFNYC, reiterated the view that the Biden regulators were making “politicised” and “inconsistent” choices in enforcing antitrust law, but expressed surprise when I told her that the FTC commissioners had voted 5-0, including its Republican members, to block Tapestry/ Capri. 

Still, parts of the FTC’s case remain novel and will come under scrutiny. The agency says that so-called serial acquirers — companies that repeatedly buy smaller competitors as their primary growth strategy — are newly worthy of review. 

Harris’s views on competition and economic issues themselves remain a mystery. She has condemned price gouging and floated a wealth tax but her longtime ties to Wall Street and Silicon Valley have given the billionaire class hope that she will not be so tough if elected president. 

One lesson from New York, however, is that style matters perhaps as much as policy. Given how much big business contributes in taxes and philanthropy in the Big Apple, financiers almost demand tokens of respect and flattery in exchange. Wylde herself revealed her group’s need for support when New York City elected a new and apparently more solicitous mayor.

“This is a great relief,” Wylde told New York Magazine in 2022. “We have eight years of a mayor who was completely disparaging of wealth and business, and New York City barely survived it. Adams [the new mayor] has been very clear that New York City needs corporations, needs the wealthy, that we have always needed them, and we don’t want to demonise them.”

EU plan for buying key commodities centrally is over-reach, warn tech groups

Trading software companies fear project will make Brussels a major competitor and believe tender misconceived

Commodity trading platforms have lashed out at EU proposals to centralise the purchase of natural gas, hydrogen and critical minerals for being bureaucratic over-reach that will make the bloc a commercial competitor.

Leading industry software suppliers have warned that the EU’s plans, which would require the companies to build a new trading system and then transfer ownership to Brussels, would also undermine European efforts to foster local tech champions. They also warned that the plans were not fit for purpose for how the target commodities were traded.

The criticisms are the starkest yet of EU efforts to aggregate demand for commodities in the hope of pushing prices down and jump-starting nascent or localised markets, in the way the bloc managed successfully for Covid-19 vaccines. Brussels also turned to joint purchases of gas after record price spikes following Russia’s full-scale invasion of Ukraine.

But Enmacc and MetalsHub, two of the continent’s leading software providers for commodities procurement, said the tender threatened to undercut the business model of tech groups in the region.

The document, released in early June and putting a value of €9mn on the project, states that “the contractor will transfer the entirety of the modular IT platform and its operation to the European Commission” after operating it for five years.

“The biggest problem that makes me choke is that my biggest competitor is the European Commission,” said Jens Hartmann, chief executive of Enmacc, a gas and green energy trading platform that handled €35bn of trades last year. “Why should the EU operate a platform if European companies already operate similar infrastructure?”

He added: “We can offer technology that we have invested €20mn in but we cannot hand over our intellectual property. As a venture-based company, we need to protect the IP.”

A commission spokesperson said that “the intention is that we have a contractor that manages this platform”, adding that the executive body needed “specific expertise” and would work “in very close co-ordination with the contractor”.

The bloc is hoping to emulate its use of a platform called Aggregate EU, run by software company Prisma, which sold 42bn cubic metres of gas last year. The new IT platform will replace AggregateEU.

Maroš Šefčovič, the European commissioner in charge of AggregateEU, said in May that there was “very high political demand for this platform” and that it would form the “blueprint” for joint buying of other strategic commodities. EU officials have said the commission could request to take over the running of the platform even earlier.

But Frank Jackel, co-founder and managing director of MetalsHub, said his company had told the bloc that “we are not happy for the EU to operate” their software platform.

“Does the European Commission want to become a competitor to leading private companies in the EU? We don’t have a huge amount of tech companies in Europe as global leaders,” he said. Policymakers were not qualified to build and operate commodity trading platforms, he went on.

One European automotive executive said joint purchasing could strengthen the supply chain for smaller suppliers but warned that the EU might use its control over market infrastructure to introduce mandatory stockpiling or requirements to reduce dependency on China.

“If the infrastructure is built by the European Commission, then we don’t want policymakers or European governments to have too much force about raw material market exchange trading platforms,” the executive said. “We don’t want to have mandatory stockpiling for industry.”

The two trading software producers also found fault with the EU plans to jointly purchase multiple commodities that have little in common.

Gas is a large and established global market, while hydrogen remains a nascent market traded exclusively on long-term contracts. And critical minerals such as lithium, graphite and rare earths are highly specialised raw materials made to customer specifications with illiquid, opaque markets.

The two groups have teamed up to bid for the tender and insist they are keen to help the EU achieve its aims on commodities purchases.

But they urged the bloc to reconsider the proposal. “It makes no sense,” said Hartmann. “They are traded differently.”

Trump’s idea of a bitcoin strategic reserve is a very bad idea

Crypto promotion by the White House would chip away at the reserve currency status of the dollar at a time when it is facing more challenges

Politics in the US has turned into one of our biggest sports. Politics has also turned us tribal — we want to win at any cost. Most importantly, we get so engrossed in the sport that we don’t realise that our future — and the future of our children — is the ball we are playing with.

At the end of July, Donald Trump called for the US to be “crypto capital of the planet” and a “bitcoin superpower”. As part of that, he promised to build a bitcoin strategic reserve. I understand why Trump is doing this; he is a politician and support for cryptocurrency means endorsements from crypto bros.

Who knows whether any policy idea offered as a campaign promise would become a reality if he is re-elected to the White House? But if this one did, it would be dangerous for the US. It is not a game where tribal support should override common sense. Let me explain why.

Bitcoin promotion by the White House would chip away at the status of the dollar at a time when sentiment towards the currency is likely to be tested.

Money is more than just green paper with the faces of dead presidents. There are many ways to define it. One way to look at it is as a claim on a country’s productive power and assets, reflecting the value of a nation’s economic output.

Another way to look at money is as a story. It’s a narrative told through everyday actions such as going to the grocery store and trading dollar bills for milk, eggs and doughnuts. As a society, we believe in the story of the intrinsic value of currency. This mass belief is incredibly important for society’s wellbeing.

A reserve currency is a global story. Many people in many countries, who may or may not have visited the US or done business with it, bought into the story that it was a democracy and that its capitalist, free-market economy made it the strongest in the world. And hey, we were responsible with our finances — our debt was manageable, and though we ran budget deficits, they were not huge.

No longer. Today our $27tn economy has $35tn in debt. We collect $4.4tn in taxes, but we spend $6.3tn — we’re running a 5.6 per cent budget deficit. Already, our finances don’t inspire a lot of confidence in the dollar. As we print more dollars every year to finance our growing budget deficits, the dollar story of an all-mighty reserve currency is losing its lustre.

Anyone who is paying attention is already starting to question the trajectory of our finances as well as the state of our political system. We used to have the undisputed reserve currency because we were great on both an absolute and a relative basis. Today, for some, we are just the best alternative, not because we are so awesome but because we are a less-dirty shirt in the old laundry basket.

This brings us to Trump’s rhetoric about wanting the US to build bitcoin strategic reserves. If he’s elected, this governmental policy would change bitcoin’s story, legitimising it and boosting the case to use it as reserve currency.

Bitcoin is not controlled by anyone, including the US government. We cannot print more of it to finance student or medical debt forgiveness, help out with first-time buyer downpayments, or deliver tax cuts when we are running huge budget deficits. Nor can our politicians print more of it to finance their campaign promises that we as a country cannot afford, just to buy themselves more votes. Yet bitcoin, just like gold, looks shinier with every empty campaign promise and every trillion dollars we add to our debt. What will happen if strangers fall in love with another story that is not green and doesn’t have pictures of the US presidents?

Well, the dollar is very unlikely to be replaced as the dominant reserve currency by an alternative any time soon given its role in trade and the global financial system. But it is being increasingly challenged by both fiat and digital currencies. This is not just a question of the economic fundamentals; other countries are diversifying their reserve holdings of currencies.

In such an environment, the US president and presidential candidates should be the dollar’s biggest salespeople rather than supporting an alternative. The bitcoin story should not be promoted — it should not even be accepted as a form of donation to candidates for the position of US president. Bitcoin is not going to make America great. What will help this country continue to be great is getting our debt and deficits under our control.

Couche-Tard’s approach to the owner of 7-Eleven could kick-start a wave of M&A activity in a country that has tended to avoid it

At shortly after 10am on Friday, with torrential rain lashing the doors and a potential $50bn takeover bid in the air, three people are queueing at the original Toyosu branch of 7-Eleven in Tokyo.

One of them is buying a croissant and coffee; one is buying a Yakult, a salmon roe rice ball and a limited edition bag of grape-flavoured fruit gums; one is buying a bag of cat treats. A batch of fried chicken emerges from the back of the store, carried by a woman wearing a jacket in the world-famous corporate livery of green, red and orange. 

“I probably spend more money in 7-Eleven than in any other shop, they are just always there, they are part of life and the food has kept getting better,” says the coffee-and-croissant purchaser. “I heard they might be sold, but I don’t think that can happen, can it?”

It can, and to a foreign entity at that. The Canadian convenience store giant Alimentation Couche-Tard, best known for its Circle K brand, has approached 7-Eleven’s parent company Seven & i Holdings with an unsolicited — but so far friendly — buyout bid. 

There is not yet a formal proposal for Seven & i’s shareholders to consider, but already many bankers, investors, lawyers and government officials are talking of it as the most important and transformative M&A deal Japan has ever seen.

Bankers talk excitedly of a “day zero” that, irrespective of the eventual outcome, could put a number of global household names in play for takeover. This is, in many respects, a battle for Japan and for its willingness to become a vibrant market for corporate control.

“I think the Couche-Tard bid accelerates and exposes everything,” says the manager of one of the world’s biggest event-driven investment funds and now a shareholder in Seven & i.

“The game is on now, and there is a good chance that Japan becomes the M&A deal centre of the world for the next 10 years.”

The history of Couche-Tard’s interest mirrors that of western investors in Japan more widely. It has courted the company on and off for two decades, but been deterred by a combination of factors. These include Japanese companies’ instinctive resistance to being acquired, the historic absence of governance pressure on them to put shareholder interests first and the ready availability of poison pills and other defence mechanisms.

Its target had been softened by two different activist investors — a relatively new phenomenon in Japan — who mounted noisy campaigns urging management to rationalise the group to improve returns.

The approach itself has been facilitated by shareholder-friendly M&A guidelines introduced last year by the Ministry of Economics, Trade and Industry (Meti), which all but oblige Japanese companies to consider bona fide takeover approaches rather than simply ignoring them.

But even in this new environment, there is now an open question over whether the government is ready to countenance a non-Japanese owner of Seven & i, while companies, in the absence of examples to the contrary, are able to convince a domestic audience that foreigners could never run such an intrinsically Japanese company better.

Convenience stores or konbini are the pinnacle of what Japan does best. They sell fresh bento, reasonably priced Cabernet Sauvignon, gelato, shirts, funeral offerings, cosmetics, metal dinosaur kits and concert tickets. Customers can pay their tax bills there, or do their banking.

They have strived to become indispensable, and won. Behind the scenes, the operation is powered by automation, robots, finely tuned supply chains and efficient distribution logistics.

“I think foreigners should be able to buy Japanese companies,” says the customer buying cat treats. “But I do not believe a foreigner could run this particular company.”

The 7-Eleven convenience store began life in Dallas, Texas, in 1927, even though the name itself wasn’t adopted for another two decades.

Executives at its parent company, Southland Corporation, were known as the “7-7-7” crowd because of their ability to work from 7am to 7pm, seven days a week.

Ito-Yokado, the forerunner company to Seven & i, struck a licensing agreement with Southland to develop the concept in Japan in 1973. After the US parent filed for bankruptcy, it seized the chance to take control of the whole group in 1991 — a time when angst in corporate America about Japanese technological, managerial and financial prowess was close to its peak.

Since then konbini have evolved into Japan’s most powerful conduit of consumption, temptation and retail innovation. After years of consolidation, the country now has three significant competitors: 7-Eleven, Family Mart and Lawson, who together control more than 50,000 stores in their home market.

Almost half of those are run by Seven & i, and pull in 22mn customers a day. The group also has convenience operations overseas, notably in the US, where in 2020 it agreed to spend $21bn in cash buying Speedway, the petrol station chain owned by oil refiner Marathon Petroleum. 

But as with many other Japanese corporations, domestic dominance and operational savoir-faire have not translated into shareholder returns. In many ways, say investors who have held the stock for years, Seven & i represents both the best of Japan and the worst.

Behind the core convenience store business sits a hinterland of supermarkets, restaurants and other often unrelated operations that have generated mixed returns and long looked ripe for sale.

An activist campaign by Dan Loeb’s Third Point hedge fund helped oust chair and chief executive Toshifumi Suzuki — once known as “the king of konbini” — in 2016, with Ryuichi Isaka taking over as chief executive.

Over the past few years Isaka has overhauled the company’s board, installing a progressive international chair, and sold off some non-core assets while promising to accelerate international expansion.

But these efforts have not been sufficient, say some investors. Alicia Ogawa, a board member at the Nippon Active Value Fund and an expert in Japanese governance reform, points out that many of the new non-executive board directors are not really independent, having come from suppliers or companies with deep ties to Seven & i.

Even allowing for the spike since Couche-Tard’s offer was made public, the company’s share price has lagged behind Japan’s benchmark Topix so far this year and over five years.

Benjamin Herrick, an investor in Seven & i with Artisan Partners, points out that since Isaka’s appointment, the company “has deployed $25bn in acquisitions, but its market capitalisation has done nothing in yen terms, and even less in dollar terms”.

“The total shareholder returns over that period are minus 1 per cent,” Herrick adds. “Over the same period, the total shareholder return for Couche-Tard is 191 per cent after deploying $12bn of capital.”

That gulf in performance has opened up a gap in both market capitalisation and valuation between Couche-Tard and Seven & i. That, along with the changing M&A guidelines and the company’s need to appear more receptive to the priorities of shareholders, has opened a rare opportunity for the Canadian group.

“What Couche-Tard is doing is taking advantage of the conglomerate discount that Seven & i has been experiencing for a long time,” says Shunsuke Kuriyama, an analyst with Jefferies in Tokyo.

“Buying the entire company is probably cheaper than just buying the international business, especially with the potential divestiture of other assets.” 

It has been almost 10 years since Japan introduced its first corporate governance and stewardship codes.

During that time there have been clear signs of progress — and a degree of disappointment that the reforms have not made as much difference as originally hoped.

But the announcement of Couche-Tard’s deal has electrified Japan’s financial industry. In more than 30 interviews with bankers, lawyers, fund managers and government officials, the majority described the bid as a turning point, a catalyst or a litmus test of Japan’s willingness to embrace a version of shareholder capitalism that it has long avoided.

Herrick, at Artisan Partners, says any rejection of Couche-Tard’s bid would set an important precedent for the rest of the market. “If [Seven & i] walk away, shareholders need to understand what was on offer. We need to know, if Seven & i is saying that the offer isn’t good enough, what exactly wasn’t good enough.” 

On Friday, Artisan sent a letter to the board of Seven & i setting a deadline for it to update investors on the takeover bid, warning that management will be “held accountable” if it dismissed the approach out of hand.

Many analysts and investors suspect that managements across Japan, watching this saga unfold, are growing concerned they will find themselves in a similar position before long.

Several prominent activist funds — two of which were involved in epic battles with the electronics group Toshiba — have previously said that their power to change Japan would ultimately be eclipsed if more overseas corporations and private equity funds followed Couche-Tard’s lead.

Japanese M&A lawyers say that, since Meti’s revisions to the guidelines last year, they have been inundated with requests from listed Japanese companies for advice on the options available should an unsolicited bid emerge.

Whatever happens with Couche-Tard, its takeover attempt will have profound implications for Seven & i and the rest of Japan, according to veteran fund managers. This is a market, says one, where companies have for decades managed to convince the outside world that they were simply not for sale at any price, and that an unsolicited approach would be doomed to more or less instant failure.

Many of the gems of corporate Japan, some of which have also posted mixed financial returns, or whose shares trade at notable discounts to their US or European rivals, can now reasonably expect to receive serious takeover approaches that they cannot simply dismiss, says one senior Japanese lawyer.

The head of one global fund that has invested in Japan for several decades says he had expected that the first significant tests of the new M&A guidelines would come from Japanese companies looking for domestic consolidation. He adds that this was the outcome probably intended by Meti when it updated the corporate governance regime.

But the Couche-Tard bid leapfrogs that process, bringing a foreign company in as an unsolicited bidder and potentially paving the way for many more. 

Some have talked about Calbee, the snack maker, consumer products group Kao, video game developer Square Enix, sportswear brand Asics and brewer Sapporo as examples of Japanese companies that would be prized additions for larger overseas rivals.

Japan’s M&A market, the investor continues, is perfectly set up for aggressive takeover tactics. Companies are not used to running defence campaigns, reflexively seeking a friendly domestic bidder rather than standing their ground. There is no shortage of these “white knights” because so many Japanese industries are highly fragmented.

Nigel Muston, a Japan retail analyst at CLSA Securities, says investor behaviour suggests a widespread belief that a Rubicon has now been crossed.

“Even if most investors feel that [the Couche-Tard] deal is not going to happen, they are staying in Seven & i stock because they believe it can never go back to where it was before the bid was announced,” he says.

7-Eleven’s image of permanence and centrality to Japanese daily life could yet become a key factor in this particular battle, say analysts, and ensure that every twist in the tale will come under intense scrutiny.

Meti in particular will be closely watched for signals that its more progressive faction, which seems happy for Japan to become a centre of global M&A activity even if that means some famous companies falling into foreign hands, is in the ascendancy.

The target may yet find itself protected, say analysts at JPMorgan. In a country where earthquakes, tsunamis and tropical storms are relatively frequent, the government sees the nation’s convenience stores as “lifeline infrastructure” that should not be under the control of non-Japanese owners.

But Ellen Lee, a portfolio manager at Los Angeles-based Causeway Capital Management, which is a top-30 shareholder, says Seven & i’s board “should not seek government protection without merit”.

“Maximising shareholder value should be a key criterion,” she adds. “To disregard it will jeopardise global investors’ confidence in governance at Seven & i and the effectiveness of Japan’s corporate governance reforms.”

The primacy of shareholder value, largely unquestioned in other large developed markets, is still very much up for debate in Japan. Ogawa, at Nippon Active Value Fund, describes it as “the eternal question: for whom is a Japanese company run?”

There appears little doubt about the bidder’s views on the matter. Couche-Tard is “the thing that was always missing”, according to the veteran investor. “Someone to step up and accept the risk of becoming known as a horrible person, an aggressive bidder prepared to take a reputational hit in Japan. But Couche-Tard hasn’t got anything else it will ever want in Japan, so what has it got to lose?”

Travis Lundy, an independent special situations analyst who publishes on the Smartkarma platform, says the Canadian group “is very aggressive and religious about costs, while Seven & i is religious about customer experience, offering multiple kinds of delicious onigiri, freshly made sandwiches, fluffy bread, yoghurts, the lot”.

For many Japanese, that is what the takeover battle could ultimately boil down to. “If Couche-Tard’s goal is to increase margins,” says Ogawa, “it’s hard to figure out how that can happen without a degradation of customer experience.”

Murdoch-owned property listings group says deal for £4.4bn UK peer would be ‘transformational’

Australia’s largest property listings company REA Group, majority owned by Rupert Murdoch’s News Corp, is considering a cash and shares offer for its £4.4bn-valued UK peer Rightmove, as it aims to become the largest online real estate business across both markets.

REA, one of Australia’s largest listed companies, said it saw “clear similarities” between the two businesses and a potential acquisition as a “transformational opportunity”.

It has yet to make an approach, but the company revealed it was considering the move after reports that it was working with Deutsche Bank on a large overseas acquisition. Rightmove had a market value of £4.36bn at Friday’s close in London.

REA has until the end of September to formally make an offer or walk away under UK takeover laws now that it has publicly expressed its interest. The company’s stock value has increased by 25 per cent in the past year, with the strength of the Australian housing market boosting profit growth.

Shares in REA dropped 7 per cent after it revealed the potential UK expansion, which is likely to involve an equity raising given the deal’s size.

In a note, stockbroker Angus Aitken described Owen Wilson, a former investment banker appointed REA chief executive in 2018, as a “sensible” executive looking to make a “common sense” acquisition.

“In the end, the worst M&A is ego-driven,” he wrote. “There is no ego here in our view, this is all about long-term economic returns.”

REA was founded in the mid-1990s in a garage in the Melbourne suburb of Doncaster and briefly became a stock market darling during the dotcom bubble after it floated on the Australian Securities Exchange in 1999.

Its shares then crashed and News Corp bought a 44 per cent stake in 2001 for about A$2mn, in what has been described as one of Lachlan Murdoch’s smartest moves. News Corp increased its stake to 62 per cent in 2005 after it tried to buy out REA for A$120mn but was rebuffed. The company is now worth A$26bn (US$17.6bn).

The activist investor Starboard Value last year put pressure on News Corp to separate its property businesses — including the REA stake — from the broader media business in order to unlock value.

REA has operations in India and a 20 per cent stake in Move Inc — the US online listings company also controlled by News Corp — but it has also quit some international markets.

It built a European online listings business that was sold to the UK’s Oakley Capital Private Equity in 2016. Last month, it sold its minority stake in south-east Asian real estate listings company PropertyGuru after it was sold to Swedish investor EQT.