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    Board Rebuffs Bid For 7-Eleven

    Calling the offer too low, shareholders file lawsuits and investors cash out.

    NEW YORK -- A bid by 7-Eleven Inc.'s Japanese affiliate to acquire the rest of the U.S. convenience store company that it doesn't already own has become anything but convenient, The Wall Street Journal reported.

    CSNews Online reported Friday that a special committee of 7-Eleven's board deemed the $32.50-a-share buyout offer by 7-Eleven Japan Co. "inadequate" and "not in the best interest of our shareholders." According to the Journal , the two sides have begun talks about a potential increase of the bid. The Japanese affiliate made its initial $1 billion offer for the remaining 27.3 percent of the U.S. company Sept. 1.

    The rebuff of the offer by Dallas-based 7-Eleven comes after some shareholders blasted the bid as lowball. Some investors sued for a better deal as others piled into the stock, pushing 7-Eleven's shares 10 percent above the Japanese company's offering price, the Journal reported. The stock, which already had quadrupled since 2003, surged from $28.34 before the offer was announced to $35.59 at Thursday's close of trading on the New York Stock Exchange.

    Officials of 7-Eleven Japan had no comment for the Journal on the committee's decision. But a spokesman said earlier this week that the Japanese company "had no plans to change the price" and extended the deadline for the tender offer to Oct. 18 from Oct. 3, the newspaper reported.

    "They'll most likely make another bid," Adam Sindler, an associate analyst with Morgan Keegan & Co. in Memphis, Tenn told the paper. "I'm just not sure where the bid will be."

    The takeover attempt is an example of a licensee's becoming larger than the parent company and attempting to engulf it. The U.S. company's origins date to 1927, when Dallas ice-house operator John Jefferson Green began selling bread, milk and eggs in addition to ice. The Japanese operation became a licensee of 7-Eleven in 1973 and expanded rapidly amid Asian customers' affinity for fresh and convenient retail fare.

    In 1991, 7-Eleven Japan and a partner took a 72.7 percent stake in the U.S. company, and 7-Eleven Japan bought out its partner earlier this year. Now, 7-Eleven Japan is bidding for the remainder. Seven-Eleven Japan operates nearly 11,000 stores in Japan, while the U.S. 7-Eleven operates almost 5,800 stores.

    The board committee echoed earlier arguments from investors in stating that 7-Eleven Japan's initial bid fails to take into account the cutting-edge merchandising programs the U.S. company has put in place to increase sales and profits, according to the Journal . Five shareholders argued in three separate lawsuits (two filed in U.S. district court and the other in county court in Dallas) that managers of the Japanese and U.S. companies conspired to craft a "grossly inadequate" bid aimed at depriving minority shareholders of the potential value of their stock in a "self-dealing going-private plan," the newspaper reported. Two of the lawsuits seek class-action status and the third is a derivative complaint aimed at returning any judgment it receives to the company. A spokeswoman for 7-Eleven declined to comment to the Journal on the lawsuits.

    The Japanese offer "does not adequately give 7-Eleven credit for the success of [its sales initiatives] or a culture of innovation, which is obsessed with introducing new merchandise and removing slower-moving merchandise from the assortment," Michael Coleman, an analyst with Southwest Securities in Dallas, wrote in a Sept. 12 note to his firm's clients, according to the Journal .

    The newspaper reported that some investors took the opportunity this week to cash out. Christopher Luck, a partner in investment-management firm First Quadrant LLP of Pasadena, Calif., said Monday that his firm is selling its position of at least 150,000 7-Eleven shares. First Quadrant is taking its profit on the stock's gain because it considers a 15 to 20 percent increase of the offer unlikely. "The gain of getting out now outweighs the risk of staying in and getting a higher offer," Luck told the Journal .

    The U.S. company's stock has surged since 2003, partly because of the company's lengthy track record of dominating the U.S. convenience-store industry and partly because of initiatives it enacted to bolster its sales and profits. The company has posted nearly a decade of consecutive quarterly gains in same-store sales, a profit measure for retailers at stores open for at least a year. In its quarter ended June 30, 7-Eleven posted a 9.2 percent increase in sales to $3.43 billion and a 22 percent jump in net income to $57.2 million.

    Before the tender offer, 7-Eleven's stock consistently traded at more than 30 times its estimated earnings per share for this year. The stocks of its closest competitors, Casey's General Stores Inc. of Ankany, Iowa, and Pantry Inc. of Sanford, N.C., typically trade in a less-expensive range of 20 to 30 times their projected earnings for the year.

    Some of 7-Eleven's dominance comes courtesy of its "model market" program, according to the Journal. Traditionally, convenience-store managers were at the mercy of centralized ordering systems and suppliers' elivery schedules. The model-market program, which 7-Eleven began rolling out at stores two years ago, allows store managers to decide the mix of products they carry, the quantity they receive and the frequency of delivery. A manager aware of an impending 10-kilometer run in the store's area can arrange to have more sports drinks stocked that weekend or order more beer and chips for the after-race festivities. So far, more than 1,000 of 7-Eleven's U.S. stores have adopted the program and those stores have reported an additional 2 to 2.5 percent gain in same-store sales compared with stores outside the program.

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