TOKYO: When Seven & i Holdings Co rejected Alimentation Couche-Tard Inc’s takeover proposal, the Japanese retailer took pains to clarify that price was the issue, not the idea of an acquisition itself.

That’s one sign of a broader change underway in corporate Japan, long considered impenetrable because of entrenched interests that protected companies.

Years of pressure from regulators and investors to loosen up are finally starting to bear fruit, creating an environment where transformational deals are now more possible.

“It’s now necessary to respond to sincere proposals with sincerity,” said Wataru Tanaka, a University of Tokyo professor who was part of a study group that crafted government guidelines on takeovers.

“They clearly say that you can’t rebuff them at the door.”

That message was clear in a letter sent by Seven & i’s committee of independent outside directors examining the proposal.

Stephen Dacus, a retail industry veteran who heads the group, stressed that the operator of 7-Eleven shops was “open to sincerely consider any proposal that is in the best interests of 7&i shareholders and other stakeholders”.

Couche-Tard’s indicated price of 5.55 trillion yen or about US$38.7bil was too low, the committee said.

But the response wasn’t an outright rejection, and instead opened a new chapter in talks between the retailers after a long period of silence since the proposal was disclosed Aug 19.

Seven & i also raised concerns over regulatory risks, given the retailers’ overlapping footprint.

Regardless of how talks between Circle K operator Couche-Tard and Seven & i play out, Japan will probably see even more merger activity, thanks to improved governance, market regulators pushing to boost value and clearer guidelines on corporate mergers.

Apart from Seven & i, which if consummated would be the largest-ever takeover in Japan, a bidding war is currently underway over Fuji Soft Inc, a 644 billion yen software developer.

“It’s a completely different environment,” said Zuhair Khan, who runs a long-short fund at Union Bancaire Privee (UBP) that invests in Japanese businesses based on the quality of corporate governance.

“Things that even a few years ago you couldn’t imagine, are now actually very much possible.”

The Canadian company’s indicated price represents a premium of about 21% from just before they made the approach public.

Seven & i shares fell 1.4% last Friday, giving it a valuation close to Couche-Tard’s proposal.

Activist investors have sought for years to crack into Japan’s insular corporate sector, with mixed success. They were often rebuffed after waging public campaigns that at times stiffened resistance in the boardroom. Softer approaches tended to deliver better results.

Last year, KKR & Co, CVC Capital Partners and Blackstone Inc abandoned a buyout of Toshiba Corp after encountering intransigent management.

Concerns about the valuation, complexity and political nature of the deal were all headwinds that eventually resulted in a domestic consortium prevailing last September.

The updated guidelines on corporate takeovers make it clear that the government expects companies to fairly and transparently assess any potential deals. They should be evaluated on the basis of whether they can “enhance corporate value” and improve “inefficient management”, the Economy, Trade and Industry Ministry said.

At stake is a broader effort to revitalise Japan’s economy after three decades of deflation and ultra-loose monetary policy.

With the Bank of Japan looking to raise rates and the need for wider structural and labour reform, there’s greater understanding that progress won’t happen without disruption, even if painful.

Although Seven & i has appealed to the government for greater protection, the Foreign Exchange and Foreign Trade Act, which could give it some refuge, was actually designed to encourage foreign investment.

The rules were enacted with two key goals in mind: to “promote foreign direct investment conducive to sound economic growth”, and to “ensure minimal review of foreign direct investment that could pose risks to national security”.

That legislation is actually less protectionist in nature than the system in place in the United States, where President Joe Biden is getting ready to block Nippon Steel Corp’s US$14.1bil takeover of United States Steel Corp.

The proposed deal is being scrutinised by the Committee on Foreign Investment in the United States, which has been used to scuttle mergers in the past on security grounds.

With political pressure to keep loosening the environment for mergers and acquisitions, it could prove difficult at this point for the Japanese government to step in to protect Seven & i, according to UBP’s Khan.

That retailer has applied to change its designation under the act as “core” to national security, which would require prior notification to the government of any purchase of its shares of more than 10%.

“Regardless of what happens with this particular acquisition, it’s sending a message to large corporate Japanese management that it doesn’t matter how big you are,” Khan said. “Larger global competitors are now increasingly aware that they can make a bid for almost any Japanese company.”

 - Bloomberg