Apollo’s Japan Deal Will Require Buyout Black Belt

Japan Inc’s defensive measures might get help from Uncle Sam. Buyout and credit giant Apollo Global Management is considering backing Seven & i’s founding Ito family with 1.5 trillion yen ($9.5 billion) for its take-private bid, Bloomberg reported on Thursday, citing sources. Global private equity firms’ gold rush in the country is intensifying, though they largely paint themselves less as barbarians at the gate than partners to domestic interests. Doing so here for the owner of 7-Eleven convenience stores will test Apollo’s ability to arrange big, novel financings.

The Ito clan, with support from Itochu, owner of rival FamilyMart, is cobbling together a combined 4 trillion yen ($25 billion) in equity commitments, according to the report, reinforcing a mooted bid originally valuing the enterprise at 9 trillion yen, or roughly $57 billion at current exchange rates. That would trump an offer from Canada’s Alimentation Couche-Tard that owns Circle-K. The possibility of the company falling into foreign hands has caused unease in Japan: a minister reiterated last week that it could be national security issue.

Ironically, foreign capital offers an obvious helping hand. There’s a dealmaking and shareholder activism bonanza underway; KKR said in April that 39% of the $47 billion it had invested in Asia-Pacific across private equity, real estate and infrastructure went to Japan, while Bain Capital foresees possibly doubling its investment pace in the country.

Yet only two Japanese buyouts have cleared $10 billion in size. One way to crack the market open wider may be to partner with previously insular corporate giants. In Seven & i’s case, though, a near-$10 billion commitment would be implausibly large in the form of pure equity from a single fund.

Apollo may follow a slightly different blueprint. Boss Marc Rowan’s firm has struck complex deals to take stakes in individual projects, stretching across its nous in credit and equity while calling on various backers. These arrangements can offer big check sizes - like the $11 billion it drummed up last year for 49% for Intel’s joint venture for a new manufacturing facility in Ireland, or its deal with beverage producer AB InBev.

Adapting that playbook for a giant buyout while protecting Apollo’s downside is different – but the Asian country, where there is lots of shareholder value to unlock, offers an appealing testing ground. Better yet, helping Japan Inc keep hold of Seven & i might earn it trust in the cosy and conservative market to do more deals.