Japan's Seven Bank raises $481 million from IPO

In a market roiled by volatility and angst, Seven Bank could be just the stable, low-risk investment investors are looking for.
It was good news for the Japanese equity markets when Seven Bank priced its initial public offering at the top of the indicated range last week. Seven Bank isn't a bank but a provider of ATM services affiliated with Seven & I, the operator of the 7-Eleven convenience store network. The company is due to start trading on the Jasdeq board on February 29.

Each share will be sold for Ñ140,000, raising a total of Ñ50.9 billion ($481 million) and making this the biggest Japanese IPO since the $3 billion listing of Sony Financial in October last year. The shares were offered in range between Ñ120,000 and Ñ140,000 apiece. Seven Bank will receive just $68 million of the proceeds, however, which it will use to expand its ATM network. The company will sell treasury stock, rather than new shares. The rest of the money will go to 26 shareholders selling down their stakes.

Demand was reportedly healthy, at least by Japanese standards, with subscription levels across the different investor categories on average 10 times the number of shares on offer.

Of the 363,750 shares being sold, 53,350 shares come from treasury stock while 310,400 shares are existing shares being offloaded by other shareholders. Some 19.9% of the offering was placed with international investors, while the remaining 80.1% was sold in Japan. Nikko Citigroup, Nomura Securities and Morgan Stanley were the joint global co-coordinators.

The two largest selling shareholders are Seven-Eleven Japan and Ito-Yokado. Both run large networks of convenience stores and own 25% and 16% respectively of the company pre-deal. Thirty percent of the company will be floated. Seven Bank operates ATMs in almost all the 7-Eleven stores in Japan and numerous Ito-Yokado stores.

ôThis offering provides investors an opportunity to invest in a stable business model with highly attractive growth prospects,ö notes Bruce Wu, co-head of equity capital markets at Nikko Citi. ôIn addition, many investors are very familiar with the company's services."

There is little question about that. Japan seems to have a convenience store on every corner. Seven-Eleven has 13,000 stores across Japan and there is an ATM in almost every one of them. The ATMs accept a range of cards from Japanese banks and offer the customer his bankÆs original interface. Non-Japanese customers can increasingly use their credit and debit cards at these machines.

Given the brand appeal, itÆs not surprising that the offering attracted strong demand from JapanÆs retail sector. About 80% of the order amount came from Japanese investors and of that portion, 70% came from retail investors. Domestic retail investors are a crucial pillar of domestic IPOs, although ironically a rising percentage of the market is owned by foreign investors.

An interesting aspect of the deal is that it could appeal to investors keen to find refuge from the difficulties of Japanese banking stocks. These make up the dominant part of the stock market by market capitalisation but sluggishness in earnings growth is reflecting an equally sluggish macroeconomic performance.

ôOne of the growth drivers is that financial institutions will be wanting to cut costs in the existing climate and outsource ATM operations to Seven Bank,ö says Nikko CitiÆs Wu. Shinsei Bank, for example, already uses Seven Bank ATMs in its unmanned outlets.

In terms of financials, Seven Bank makes 92% of its total income from ATM fees. The company made $130 million in net income in the fiscal year ending March 2007. Total assets amounted to $5.7 billion in September 2007. Return on equity in fiscal 2007 came to 17%, while return on assets amounted to just under 6%. The company, set up in 2001, turned profitable in 2006. The final price corresponds to a price-to-earnings ratio of 13 times for fiscal 2008, and will result in a market capitalisation of about $1.6 billion at the time of listing. The latter will put it on par with Japan's regional banks.

Seven Bank staff would probably disagree, but itÆs still startling that such a relatively straightforward business should have become the largest IPO in Japan since the listing of Sony Financial last year. Straightforward does not mean easy to emulate, however. ATMs are expensive to install and tricky to operate. Seven BankÆs expertise and huge reach across Japan is thus hard to replicate by anyone except the Post Office Bank, which has access to some 26,000 ATMs in Japan via the post office network. The latter has recently started commercial banking services ahead of its 2017 privatisation and could become a formidable threat û most post office branches, for example, accept many foreign debit cards.

The listing of an ATM service provider reflects the importance of cash payments in Japan, when most countries are transferring to electronic cash storage cards û for example, LondonÆs Oyster Card, Hong KongÆs versatile Octopus card and even JapanÆs own Edy, Suica and Nanaco cards. Nomura Securities recently calculated that around 75 million electronic cards of one type or another are currently in circulation in Japan, a number which reflects a rapid growth rate. However, ATMs also have an important function in recharging those electronic money cards, and the growth of electronic money may be as much an opportunity as a threat.

Bankers will surely be hoping this deal goes well. The Japanese equity markets were in the doldrums in 2007, after strong performances in 2005 and 2006. And this year does not appear to be shaping up any better: according to Dealogic, Japan ECM volume totals $1.9 billion via 19 deals so far this year (up to February 22), which is 49% lower than in the same period last year and down 84% from the same period in 2006. Year-to-date there has been nine IPOs in Japan, raising $666 million, which marks a decrease of 8% in volume terms on the same period last year when there were 22 deals.

Year to date, Nomura ranks first both on ECM volume and revenue with a market share of 38% and 41%, respectively.
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