Monday, September 15, 2008

The Battle for Longs

Just before the weekend, Walgreens (WAG) announced that it would top CVS Caremark’s (CVS) bid for Longs Drug Stores (LDG). See Walgreen Jumps In With Rival Bid for Longs Drug.

Expect this battle to continue as Longs shareholders angle for a better price now that an outright bidding war has started.

Longs is a ripe target for a strategic buyer such as CVS or WAG. It has many good West Coast locations and is one of the last remaining large chains. Longs also owns a top 25 Pharmacy Benefit Manager (PBM), RxAmerica, which could fit with either company.

I suspect there are many operational improvements possible, too. Pharmacy sales are less than 50 percent of total revenues, which is far below the average at other chains. A recent Consumer Reports study highlighted customer service problems at Longs, noting that 42% of Longs customers complained that prescriptions weren't ready when promised or that there was a long wait at the counter.

Meanwhile, the deal dynamics will make it fun to watch this transaction develop. Longs just settled shareholder lawsuits related to its real estate assets and in the process “conceded that its board never sought a third-party appraisal to value the company's real estate before approving the merger” (per Longs Settlement Includes Disclosure Of CVS Decision). Whoops!

So last Thursday, Pershing Square Capital Management sent a letter to the LDG board, stating: “We believe that the value of Longs to CVS and other interested parties substantially exceeds the announced deal price.” Pershing claims to have an “economic exposure” of almost 26 percent to Longs’ outstanding common stock.

It's worth watching Bill Ackman from Pershing explain why he thinks a $90 to 95 per share valuation makes sense. (WAG just offered $75 per share.)

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