Longs Drugs faces competing offers

Who eventually buys the drugstore chain would affect growth plans for Hawaii

STORY SUMMARY | READ THE FULL STORY

Walgreen Co. offered yesterday what it calls a superior acquisition price of $3 billion, including the assumption of debt, for Longs Drugs.

Longs already agreed last month to a $2.9 billion acquisition (also including debt) by CVS Caremark Corp., but the deal does not have the approval of some of Longs' major shareholders.

Walgreens Chairman and Chief Executive Jeffrey Rein, in a letter to the board of directors at Longs Drug Stores Corp., said he was prepared to go directly to Longs' stockholders.

Walgreens opened its first Hawaii store last November but would be fast-tracking its expansion here with the acquisition of Longs' retail drugstores.

---

FULL STORY »

Walgreen Co. has stepped in with a proposal to purchase Longs Drugs for $3 billion, including debt, which the would-be acquirer says is superior to the former offer by CVS Caremark Corp.

LONGS DRUG STORES Entry to Hawaii: 1954 Locations in Hawaii: 41* Headquarters: Walnut Creek, Calif. Stores nationwide: 521 Annual revenue: more than $5 billion Founders: Brothers Joe and Tom Long (1938) Source: Longs Drug Stores Corp. * Including two under construction CVS CAREMARK Entry to Hawaii: 2000 Locations in Hawaii: 1 (1 more planned) Headquarters: Woonsocket, R.I. Retail stores: 6,300* Annual revenue: $85 billion Founders: Brothers Stanley and Sidney Goldstein and partner Ralph Hoagland (1963) Source: CVS Caremark Corp. * Not including specialty pharmacies WALGREENS Entry to Hawaii: November 2007 Locations in Hawaii: 1 (5 more in the works) Headquarters: Deerfield, Ill. Stores planned in Hawaii: 25 to 30 Retail stores: 6,443 Annual revenue: $59 billion* Founder: Charles R. Walgreen Sr. (1901) Source: www.walgreens.com * Fiscal 2008 sales

The Deerfield, Ill.-based drugstore corporation put forth its proposal yesterday, which, at $75 per share in cash, represents a $3.50 per-share premium over CVS's offer last month.

"We believe the combination of Walgreens and Longs is a highly compelling transaction that is superior to the pending transaction with CVS Caremark, accelerates Walgreens' expansion into high-growth markets and delivers meaningful cost synergies," said Walgreens Chairman and Chief Executive Jeffrey Rein.

Rein added that Walgreens has completed six significant acquisitions over the course of two years and has a proven track record of integrating companies to benefit its customers and employees.

"We look forward to Longs' careful consideration of our offer and an open dialogue with its board of directors to complete this transaction," he said.

Walgreens is working with real estate investors Lubert-Adler Management Co. LP and Klaff Realty LP to address any potential store sales that might be necessary in connection with the transaction.

The CVS deal

In August, CVS of Woonsocket, R.I., announced an agreement with Longs to acquire the drugstore chain for $2.9 billion, including the assumption of debt.

CVS had said it would retain the Longs management and staff in Hawaii and keep the Longs Drugs name in the isles as well, although it would convert the names of the stores on the mainland.

The acquisition would include 521 Longs retail drugstores in Hawaii, California, Nevada and Arizona as well as its Rx America subsidiary, which offers prescription benefits management services to more than 8 million members.

However, the deal has been held up by shareholder disapproval.

Advisory Research Inc., the biggest shareholder of Longs Drug Stores Corp., said in a Bloomberg News report yesterday that it will not tender shares to CVS because the $71.50-a-share offer price is not enough, particularly when its real estate assets were included.

Advisory Research holds about 9.2 percent of Longs shares. Another investor, Pershing Square Capital Management LP, also said it would not back the CVS purchase and called for an open, competitive sale.

Longs Drugs spokesman Mark Holz could not be reached for comment at Walnut Creek, Calif., headquarters by press time yesterday. CVS Caremark also could not be reached for comment.

The move puts pressure on CVS to raise its bid or risk losing a chance to move forward with the Longs acquisition.

CVS CEO Tom Ryan said on CNBC yesterday, however, that the company was "not moving" on its price.

Walgreen's first store

Walgreen Co. was in discussions with Longs Drugs for several months prior to the announcement of the deal with CVS, according to Walgreens spokesman Michael Polzin.

"In conversations we've had, and in talks with real estate experts, we concluded that Longs had a compelling value that warranted our proposal," said Polzin. "It's a firm proposal."

The proposed acquisition would also fast-track Walgreen's expansion in Hawaii and its previously announced goal of opening 25 to 30 stores here.

Walgreens opened its first store here last November at the former Tower Records store on Kaheka Street.

A second store is under construction at the former Kaneohe Star Market, which is slated to open in November, followed by a third store at the former Price Busters in Kailua, scheduled to open in March.

Walgreens is also planning stores in Kalihi, Aiea, Lahaina and possibly Nuuanu.

"Obviously, if we were successful in acquiring Longs, that would change our plans to some extent for new locations in Hawaii," said Polzin. "As of now our plans are still to move forward."

Polzin said it was too early to say whether Walgreens would keep the Longs Drugs name.

"Our first store has done fantastic there," he said, "and we're so enthusiastic about the reception we received from the people of Hawaii. It has us very excited to keep going in the market."

In a letter to the Longs board of directors, Walgreen CEO Rein said Walgreens has had a long-standing, sincere interest in Longs, including an earlier offer at $70 a share, but did not receive due-diligence materials from the company.

He added that Walgreens was prepared to take the transaction directly to Longs' shareholders.

Honolulu retail analyst Marty Plotnick said Longs' underlying value is in its real estate.

"Walgreens owns very little real estate here," said Plotnick. "Now Walgreens wants the locations just like CVS."

Longs owns about 200 store locations, at least three distribution centers and three office facilities, including a district office at Sand Island on Oahu.

While CVS was smart to keep the Longs Drugs name, Plotnick said Walgreens, with one store, already has some recognition in Hawaii. All three drugstore chains have their own house brands, which is subject to change with an acquisition.

"There will be a major change no matter who takes over Longs," he said. "It's going to change."