News ReleaseLawson and CVS Bay Area Inc. Announce Basic Agreement on an Absorption-type Company Split

NEWS RELEASE

TOKYO, JAPAN, 11 22, 2017

Lawson, Inc. and CVS Bay Area Inc. decided to approve two company splits at their respective Board of Directors’ meetings held on November 22, 2017. Company split No.1 would involve transferring a portion of Bay Area’s convenience store operations (91 directly operated stores and five franchise stores) to Lawson as the succeeding company. In company split No.2, the succeeding company would be a fully owned subsidiary that Lawson intends to establish called Lawson Urban Works, Inc.
This agreement is subject to the successful completion of all necessary legal procedures and actions relating to the prohibition of private monopoly and upholding of free trade.

1.Aim of the company splits

Bay Area supports Lawson’s corporate philosophy to “Create happiness and harmony in our communities.” In January 2012, Bay Area signed a business franchise agreement with Lawson, and started operating stores under the Lawson brand from March of the same year. Since signing the agreement, Lawson and Bay Area have maintained a strong relationship as business partners. Recently, Bay Area asked Lawson if it was willing to take over the management of its convenience store operation, so that Bay Area could consolidate its business selection and focus management resources on its outstanding hotel operation and new business creation. After comprehensively investigating Bay Area’s convenience store operation management and accession scheme policy, Lawson decided to accept the proposal under the aforementioned company split format. The two companies intend to continue working together as business partners, with Bay Area continuing to operate, under the Lawson brand, the portion of its convenience store business that is not part of the company split underlying operation, and Lawson offering store-management support.
The company splits will involve approximately 160 of Bay Area’s approximately 230 employees becoming employees of the newly formed Lawson subsidiary company. In addition, the five Bay Area franchise stores that currently have a franchise agreement with Bay Area, will be expected to sign a new franchise agreement with Lawson on the effective date of the company split.

2.Overview of company splits

(1) Schedule for company split No.1 and No.2
Board meeting to approve company split No.1 and No2 (Lawson) November 22, 2017
Board meeting to approve company split No.1 and No2 (Bay Area) November 22, 2017
Registration of new Lawson subsidiary company November, 2017 (tentative)
Signing of company split basic agreement (operational transfer) November 2017 (tentative)
Signing of company split agreements December 2017 (tentative)
Date company splits come into effect March 1, 2018 (tentative)
Payment date March 1, 2018 (tentative)
Note: Company split No.1 is a simple company split as determined under Item 2, Article 784 of the Companies Act for Lawson, Inc, and can be executed without seeking prior approval from the general shareholders’ meeting. Lawson intends to conduct company split No.2 through a fully owned subsidiary firm.
(2) Style of company splits
Company split No.1
Company split No.1 is a simple absorption-style company split with Bay Area as the split company and Lawson the succeeding company.
Company split No.2
Company split No.1 is an absorption-style company split with Bay Area as the split company and the newly formed Lawson subsidiary firm as the succeeding company.
(3) Financial payments relating to the company splits
Bay Area is scheduled to receive a cash payment of 4,473 million yen from Lawson for company split No.1 and a cash payment of 361 million yen from the newly formed Lawson subsidiary firm for company split No.2.
(4) New equity and bond warrants generated by the company splits
None
(5) Increase in capital related to the company splits
None
(6) Rights and obligations to be inherited by the succeeding company
Through company split No.1 and No.2, Lawson and the newly formed subsidiary company will inherit a portion of the assets, rights and obligations pertaining to specific Bay Area convenience store operations. Any operational obligations that emerge prior to the effective date of the company splits, such as accounts payable, accrued liabilities, and other money transactions will belong to Bay Area. For details see 5. Summary of inherited business segments below.
(7) Expected discharge of obligations
There is not expected to be any problem with the discharge of respective obligations by Lawson, Bay Area, and the newly formed Lawson subsidiary firm with respect to Company split No.1 and No.2.

3. Basis for allocation under company splits No.1 and No.2

(1) Underlying basis and reason for allocation
To ensure a fair and appropriate allocation for company split No.1 and No.2, Lawson selected Natsume Audit Corporation to serve as an independent calculation agent and tasked them with calculating the value of the underlying operations for the two company splits. Both Lawson and Bay Area took into consideration the calculations performed by independent calculation agents, as well as the latest performance and future estimated performance of the underlying operations linked to the company splits. Having carefully discussed all details relating to company split No.1 and No.2 together, Lawson and Bay Area signed a company split agreement based on the judgement that the details written in the segment entitled (3) Financial payments relating to the company splits (under 2. Overview of company splits) were fair and proper.
(2) Items pertaining to value calculations
1) Name of calculation agent and relationship with Lawson
As mentioned above, Lawson appointed Natsume Audit Corporation as an independent calculation agent and asked to assess the value of the underlying assets pertaining to company split No.1 and No.2. Natsume Audit Corporation has no prior relationship with either Lawson or Bay Area, and no significant interest in the company splits currently under consideration.
2) Explanation of calculation method
For company split No.1, Natsume Audit Corporation judged it appropriate to base its evaluation on the expected cash flow to be generated from future business, on the assumption that Lawson and Lawson Urban Works would continue to operate the underlying operation after the company split. As a result, Natsume adopted an income approach when calculating the value of the underlying operation, using the discounted cash flow (DCF) method.
In its calculations, Natsume also assumed the year ending February 2019 as the first fiscal year of the operational plan, that all operations would be conducted according to the current franchise contracts agreed with Lawson until those contracts expire, and that all business franchise contracts would be extended for a fixed period upon maturity. The value assessment assumes overall store numbers and profit levels remain steady.
The result of Natsume Audit Corporation’s independent value calculation: Lawson payment to Bay Area for company split No.1 should fall within an evaluated range of between 3,752 and 5,480 million yen. As such, Lawson judged a cash payment of 4,473 million yen to be appropriate.
For company split No.2, Lawson has judged a cash payment of 361 million yen to be appropriate based on a market price method evaluation of inherited assets and liabilities. This figure will to be recalculated using inherited asset and liability figures for February 28, 2018.
Finally, when evaluating the value of the underlying operation, Natsume Audit Corporation used information provided by Lawson, either through public disclosure or specifically for the purpose of the evaluation. All information and documentation provided was assumed to be accurate and comprehensive.
Natsume did not undertake any active checks of the accuracy or entirety of the information. In addition, Natsume did not conduct its own evaluation, appraisal or measurement of the underlying assets and obligations, or any analysis or evaluation of each individual asset or obligation, nor did it commission a third-party appraisal or measurement of these assets.
(3) The likelihood of any delisting and reasons behind that prediction
These company splits are not expected to result in the delisting of Lawson stock from the Tokyo Stock Exchange.

4. Overview of Lawson, Inc., CVS Bay Area, and Lawson Urban Works, Inc

(1)Company split No.1 and No.2
Succeeding company 1 Succeeding company 2 Split company
(1)Company Lawson, Inc. Lawson Urban Works, Inc. CVS Bay Area Inc.
(2)Business location East Tower, Gate City Osaki, 1-11-2 Osaki, Shinagawa, Tokyo East Tower, Gate City Osaki, 1-11-2 Osaki, Shinagawa, Tokyo 1-9-2 Mihama, Urayasu, Chiba Prefecture
(3)Name and title of representative director Sadanomu Takemasu
President and CEO,
Representative Director,
Chairman of the Board
Tatsuya Takamori
President and CEO
Tomihiko Kamiyama
President and CEO
(4)Main areas of business operation Convenience store operations Convenience store operations “Lawson” convenience store operations, business hotel / smart hotel operations
(5)Capital 58,506 million yen 10 million yen (tentative) 1,200 million yen
(6)Established April 15, 1975 November 2017 (tentative) February 1981
(7)Shares issued 100,300,000 shares 1,000 shares 5,064,000 shares
(8)Business year end End of February End of February End of February
(9)Number of employees 8,377 (consolidated) 237 (non-consolidated)
(10)Major customers Mitsubishi Shokuhin Co., Ltd. Lawson, Inc.
(11)Main bank Bank of Tokyo-Mitsubishi UFJ, Ltd. Sumitomo Mitsui Banking Corporation
The Keiyo Bank, Ltd.
(12)Major shareholders and shareholdings ratio Mitsubishi Corporation
50.1%
Lawson, Inc.
100.0%
YUNEISIA CO., LTD
26.5%
(13)Relationship between listed companies and companies concerned Capital Lawson subsidiary fully owned by Lawson, Inc. None
Personal None
Business None
Pertinent information on relationship with related parties None
(14)Three-year overview of Lawson consolidated financial results (millions of yen)
Financial year end February 28, 2015 February 29, 2016 February 28, 2017
 Net assets 263,797 272,997 285,995
 Total assets 764,614 803,212 866,577
 Net assets per share (yen) 2,561.25 2,643.97 2,748.39
 Gross operating revenue 497,913 583,452 631,288
 Operating profit 70,482 72,541 73,772
 Recurring profit 71,714 69,622 73,014
 Net profit 32,686 31,381 36,400
 Net earnings per share (yen) 327.08 313.81 363.96
(15)Three-year overview of Bay Area consolidated financial results (millions of yen)
Financial year end February 28, 2015 February 29, 2016 February 28, 2017
 Net assets 2,014 2,172 2,193
 Total assets 10,801 12,647 12,817
 Net assets per share (yen) 40.82 440.13 444.37
 Gross operating revenue 28,726 29,193 29,452
 Operating profit 230 151 -33
 Recurring profit 278 145 213
 Net profit 225 198 94
 Net earnings per share (yen) 4.56 44.22 19.13
Note: The succeeding company Lawson Urban Works, Inc. will only just have been established. Therefore, it does not have any recent performance data or financial history.

5.Summary of inherited business segments

(1) Business operations of inherited segments
Convenience store operations
(2) Inherited assets, liabilities and any other rights and obligations
1) Rights and obligations relating to the underlying stores/facilities
 ●All fixed assets relating to the business designated for transfer, with the exception of a portion of stores (Lawson)
 ●All product inventory, small change and telephone subscription rights relating to the stores designated for transfer (Lawson Urban Works)
 ●The right to claim return of security deposits relating to lease contracts of all stores designated for transfer (Lawson)
 ●The liability to return security deposits relating to lease contracts and cash equivalent to the cumulative sum of those said security deposits (Lawson)
 ●Accrued pension costs and accrued bonuses for employees engaged mainly in the stores designated for transfer (Lawson Urban Works)
 ●Asset retirement obligations for the business designated for transfer (Lawson)
2) Inherited contracts
 ●Leases, subleases and other related contracts (Lawson)
 ●Business franchise contracts concluded separately with Lawson for stores designated for transfer (Lawson Urban Works)
 ●Employment contracts for employees engaged mainly in the stores designated for transfer (Lawson Urban Works)
3) Permits and licenses
All permissions, licenses, authorizations, registrations and notifications relating to 1) Rights and obligations relating to the underlying stores/facilities, and 2) Inherited contracts above that the split company can legally transfer to the succeeding company on the day the company split takes effect (including licenses under application). (Lawson & Lawson Urban Works)
(3) Business performance of operation designated for transfer (Year ending February 2017)
Total operating revenue: 18,624 million yen
Gross profit on sales: 5,305 million yen
(4) Type and total of assets and liabilities to be succeeded (millions of yen)
Assets Liabilities
Type Book value Type Book value
Cash and deposits 39 Advance receipts 70
Inventory assets 390 Accrued bonuses 49
Other current assets 70 Accrued pension costs 89
Tangible fixed assets 94 Asset retirement obligations 233
Intangible assets 3
Investments & other assets 636
Total 1,235 Total 441
Notes: The inherited assets and liabilities are estimated totals for February 28, 2018. Inventory assets and other items may change up until the date at which the company split takes effect. As a result, the inherited totals for assets and liabilities may differ from those in this table.

6.After the company splits

There will be no change to Lawson’s trading name, business location, representative director name and status, business operations, capital or financial year end.

7.Overview of accounting treatment

None

8.Future business outlook

Any impact on Lawson’s consolidated business performance from company split’s 1 and 2 are expected to be minimal.

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