TOKYO -- Japanese retail giant Seven & i Holdings said on Friday it had turned down Canada's Alimentation Couche-Tard's $38.5 billion cash bid, rejecting an offer that would be the largest-ever foreign buyout of a Japanese company.

7-Eleven operator Seven & i said the takeover proposal was not in the best interest of shareholders and was likely to face significant antitrust challenges in the U.S., where the combined company would be the convenience store industry's biggest by a considerable margin.

Seven & i, which said last month it had received an offer from Circle-K owner Couche-Tard without naming the price, disclosed the bid was at $14.86 a share and said it was open to "sincerely consider" any proposals.

But it would "resist any proposal that deprives our shareholders of the company's intrinsic value that fails to specifically address very real regulatory concerns," Seven & i said in a letter addressed to Couche-Tard.

"We do not believe, for several critical reasons, that the proposal you have put forward provides a basis for us to engage in substantive discussions regarding a potential transaction," said the letter sent from Stephen Dacus, the chair of the Seven & i special committee of independent directors that was formed to consider the offer.

Couche-Tard did not immediately respond to a request for comment from Reuters. Its incoming CEO Alex Miller said on a post-earnings call on Thursday that Couche-Tard was confident in its ability to finance and complete the deal.

Seven & i shares were trading about 0.3 percent higher at 2,157 yen ($15.06) on Friday morning, above the value of the $14.86 per share proposal. The stock traded at 1,761 yen ($12.29) before Couche-Tard's approach was announced on August 19.

Couche-Tard shares have fallen about 8 percent since its proposal to Seven & i was made public.

The Japanese company said if Couche-Tard was to increase the value of the offer "very significantly" it would still be concerned over whether a takeover would be able to progress.

"Your proposal does not adequately acknowledge the multiple and significant challenges such a transaction would face from U.S. competition law enforcement agencies in the current regulatory environment and provides no certainty to closing," Dacus said in the letter.

Travis Lundy, an independent analyst who publishes on Smartkarma, said there still appeared to be room for Couche-Tard to improve its proposal.

"It was an opening salvo," he said. "Everyone knows it wasn't their last and best offer and wasn't going to be fully fleshed out."

While Seven & i is much larger than Couche-Tard in terms of sales, stores, and employees, its shares have underperformed for years, drawing complaints from investors including ValueAct Capital about the company's management and asset structure.

Global reach

Despite the rejection, Couche-Tard's bid is the latest example of the growing interest in Japanese companies by Western investors, who have been drawn by the country's push for better governance.

A Seven & i takeover would eclipse the existing largest-ever foreign buyout in Japan which was the $18 billion purchase in 2018 of Toshiba's memory chip business by a consortium led by private equity firm Bain.

The deal, if agreed, would allow Couche-Tard, which has a market value of about $52 billion, to boost its global reach and improve economies of scale.

Yet it would almost certainly attract regulatory scrutiny in the U.S., analysts said, where grocery chain Kroger's proposed $25 billion merger with smaller rival Albertsons announced in 2022 was halted recently due to an antitrust lawsuit.

7-Eleven is the biggest U.S. convenience store operator with a 14.5-percent share of the market in 2023 and Couche-Tard's brands had a 4.6-percent share, according to analytics and consulting firm GlobalData.

Jefferies said in a note on Thursday that the combined company might require divestitures of stores in the U.S., mainly in the West, Midwest and Central regions.

($1 = 143.2300 yen)