By Scott Murdoch and Kane Wu

(Reuters) -Canada's Alimentation Couche-Tard said on Sunday it was willing to engage in confidential discussions with Japanese retail giant Seven & i Holdings on its $38.5 billion takeover offer, as it remains keen on pursuing a buyout.

Shares in 7-Eleven convenience store owner Seven & I rose 2.7% in early Tokyo trading on Monday to about 2,190 yen ($15.35), above the $14.86 per share all-cash proposal from the Canadian firm that it rejected on Friday.

Seven & i said the deal was not in the best interest of its shareholders and could face antitrust challenges in the U.S., where the combined company would be the biggest convenience store operator by a considerable margin.

Couche-Tard, which owns the Circle-K brand, said in a statement it would consider divestitures that might be required to secure regulatory approvals and believed it would offer a compelling combination that would address all regulatory concerns in Japan.

"Given the mutual benefits of a combination, we are disappointed in 7&i's refusal to engage in friendly discussions. We are highly confident that collaborative discussions would lead to our ability to find increased value for 7&i shareholders," Couche-Tard said.

Couche-Tard said it was confident of arranging financing for the deal, which would be the largest-ever foreign takeover of a Japanese company and the biggest all-cash offer for a firm since Elon Musk bought Twitter for $40.2 billion in 2022, according to LSEG data.

"We have secured a letter from our financial advisor stating that it is highly confident that it is able to arrange the financing for the proposed transaction, subject to customary conditions," the Canadian company said.

Seven & i said on Friday that even 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.

Seven & i did not respond immediately to a request for comment on Couche-Tard's renewed overtures.

"Based on the response from Couche-Tard it would appear there is scope for a higher offer and this will be required to get the Seven & i board to engage further," said Manoj Jain, founder and co-chief investment officer at Maso Capital, which is a shareholder in Seven & i.

"The all cash nature to the current offer is important to Seven & I shareholders," Jain said. "This is a highly complex transaction and antitrust is a key consideration. We would expect divestments will be required in order to gain approval, especially in U.S."

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.

"Seven & i is currently undervalued because of various reasons to do with structure, timing and corporate culture. Its underlying long term value is much, much higher" said JapanConsuming co-founder Michael Causton who publishes on Smartkarma.

"Couche-Tard knows this and its bid timing speaks to its skills as a deal maker. But it will be a hard fight to get Seven & I at a low price ... a lot of investors know its real value."

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

Bloomberg News earlier reported about Couche-Tard's plans and said it had not ruled out going directly to the shareholders with its bid.

($1 = 142.7000 yen)

(Reporting by Scott Murdoch in Sydney and Urvi Dugar and Devika Nair in Bengaluru; additional reporting by Ritsuko Shimizu in Tokyo; Writing by Scott Murdoch. Editing by Chizu Nomiyama, Diane Craft, Jamie Freed and Lincoln Feast)