Longs Drug Board continues to recommend CVS Caremark tender offer; says no to Walgreen - Update

Tue. September 23, 2008; Posted: 09:43 AM

Longs noted that the Walgreens' letter of September 22 had no changes to its unsolicited, non-binding expression of interest announced earlier. The company cautioned that Walgreens has given no assurances that the expression of interest will result in a transaction at the price set forth in the expression of interest or otherwise. Walgreens assumes limited antitrust risk and does not provide comparable uncertainty of consummation to the CVS Caremark transaction, the company said.

Longs noted that Walgreens, which had previously reviewed the potential for a transaction with the company, is not proposing to compensate Longs' stockholders for delays in consummating a transaction and not proposing to accept inherent regulatory risks. Also, Walgreens' expression of interest is non-binding, conditioned on diligence and is not financed, the company said.

Longs, earlier this month, had confirmed the receipt of an expression of interest from Walgreen, offering $75.00 per share in cash for all of company's outstanding shares. The proposed deal valued Longs Drug at about $3 billion, including the assumption of debt of about $200 million.

On Monday, Walgreens, in a letter to Longs Drug, expressed its disappointment with Longs' unwillingness to discuss its proposal and warned that it would take the transaction directly to Longs' stockholders if required.

Walgreens, the largest U.S. drugstore chain, indicated that relative to the offer by CVS Caremark of $71.50 per share, its offer of $75.00 per share would return a higher value to Longs' stockholders and the fact that they will continue to receive dividend payments would mitigate the impact of the time required to obtain the required regulatory approvals.

The Deerfield, Illinois-based Walgreens said it believes Longs has significantly overstated the regulatory risk, stressing that the pharmacy business is highly competitive and that, upon consummation of the proposed transaction, the combined Walgreens/Longs will account for less than 35% of the retail pharmacies in almost every metropolitan area where the two companies participate.

CVS, the second-largest U.S. drugstore chain, agreed in August to acquire Longs Drug for about $71.50 per share in cash, or $2.9 billion, including the assumption of net debt. The offer represented a 32% premium to Longs Drug's closing price of $54.04 on the same day. Within a week of the announcement, Longs Drug recommended its shareholders to approve the deal.

The deal is expected to expand CVS Caremark's position as the number one provider of prescriptions in the U.S. and help gain stores in fast-growing markets like California, Nevada, Arizona and Hawaii. Following the acquisition, the Woonsocket, Rhode Island-based CVS Caremark would fill or manage more than 1.2 billion prescriptions per year and operate approximately 6,800 drugstores in 41 states and the District of Columbia.

However, Longs Drug's biggest shareholder, employee-owned investment manager, Advisory Research Inc., which holds about 9.2% of the company, opposed CVS' bid saying it was not enough. Advisory Research was influenced in part by the recommendation of RiskMetrics Group Inc. that Longs Drug shareholders should not tender their shares to CVS.

Other smaller investors, including activist investor Bill Ackman, also called for an open and competitive sale. Ackman noted that Longs Drug's real estate is worth about as much as the CVS offer.

CVS, which operates 6,300 stores in 40 states, has extended the expiration of its tender offer. The company needs at least two-thirds of Longs Drug shares to be tendered.

Longs Drug, based in Walnut Creek, California, operates 521 drugstores in California, Hawaii, Nevada, and Arizona. The company also owns a prescription benefits management unit RxAmerica that manages prescription benefits for eight million people and 450,000 Medicare beneficiaries.

Wachtell, Lipton, Rosen & Katz is acting as legal advisor to Longs, while JPMorgan is acting as its financial advisor.

In Tuesday's regular trading session, LDG is trading at $75.18, up $0.67 or 0.90% on a volume of 25,000 shares. In the 52-week period, the stock has been trading in a range of $36.65-$77.00.

WAG is currently trading on the NYSE at $31.65, down $0.11 or 0.35%. The stock has been trading in a range of $31.25-$48.09 in the past 52 weeks.

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