CVS Buying Longs Drug for $2.7B

Woonsocket, R.I. CVS Caremark Corp. said Tuesday that it is buying Longs Drug Stores Corp. in a deal valued at $2.7 billion. The $71.50 per-share cash offer, announced after the end of trading Tuesday, was a 32% premium over Walnut Creek, Calif.-based Longs' closing price of $54.04.

Longs operates 521 drug stores, mostly in California, and also has sites in Hawaii, Nevada and Arizona. Executives at CVS said the acquisition will give the chain a significant presence in fast-growing West Coast markets where property is often unavailable or expensive to acquire.

"Geographic reach has become a more important thing for us," CVS chief financial officer David Rickard told the Associated Press in an interview. "This directly addresses the Central and Northern California markets and gives us access to those consumers."

CVS executives said building such a portfolio could take the company a decade to complete, while spending hundreds of millions to acquire on property.

"These are highly attractive regions of the country, where we are not currently represented," CVS chairman and chief executive Tom Ryan told investors during a conference call. "And they are very difficult real estate markets to penetrate."

The Longs stores in the continental United States will be converted to the CVS brand in 2009, while the locations in Hawaii will retain the Longs' name for the foreseeable future.

As part of the deal, CVS will also acquire Longs’ Rx America subsidiary, which offers prescription-benefits-management services to over 8 million members and prescription-drug-plan benefits to approximately 450,000 Medicare beneficiaries.

Longs was founded 70 years ago by brothers Joe and Tom Long. In recent years, some industry analysts said Longs would have a difficult time competing with national players such as CVS, Walgreens Co., and Rite Aid Corp. Analysts were also critical of the regional chain’s outdated technology and lack of customer conveniences.

The deal is the latest in an acquisition strategy that has seen CVS leapfrog over rival Walgreen Co. to become the largest drug store chain in the country in terms of number of stores. After the acquisition is complete, CVS will operate 6,800 drugstores in 41 states and in the District of Columbia.

Although some analysts questioned the timing and price of the purchase, most said the move is a good geographic fit. They noted that CVS is still integrating Caremark and has experienced some slowing momentum lately.

Credit Suisse analyst Edward J. Kelly said in an Associated Press report that the offer was "surprisingly high" and added that Longs is "not a compelling strategic fit" because its stores are too big and 90% of its portfolio is located in less-desirable strip centers. He added, however, that the move makes sense from a geographic standpoint, since it expands CVS’ West Coast presence.

Citi Investment Research analyst Deborah L. Weinswig was more positive about the purchase price.

"While investors may find the purchase price high, we believe that the price CVS paid was reasonable based on historical acquisition multiples, as well as the acquired real estate assets valued at over $1 billion, and access to key retail markets and new markets for its growing pharmacy-benefits-management business,” Weinswig said in the same AP report.

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