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7-Eleven, Inc. -- Moody's places 7-Eleven's Baa1 issuer rating on review for downgrade

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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.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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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