Walgreens roils CVS’ Longs deal with 11th hour takeover bid; CVS stands firm

DEERFIELD, Ill. In a dramatic 11th-hour development, Walgreens crashed the industry’s largest recent merger party with an unsolicited bid to buy Longs Drug Stores Corp. for nearly $3 billion in cash and debt assumption. The bid—announced late Friday evening—scrambles a takeover agreement Longs had already approved with rival CVS Caremark.

Longs agreed Aug. 12 to a $2.61 billion purchase offer from CVS. Walgreens’ last-minute proposal amounts to $75 per share in cash for Longs, which the company said “represents a $3.50 per share premium over the cash purchase price to be paid to Longs shareholders under the proposed acquisition by CVS/Caremark.”

Walgreens’ unexpected higher offer could lead to a bidding war for the venerable West Coast chain, with the eventual winner grabbing what is by far the richest regional prize left in U.S. pharmacy retailing.

If Walgreens prevails over CVS, it would acquire more than 500 large-scale Longs drug stores in California, Hawaii, Nevada and Arizona, as well as Longs’ prescription benefits management subsidiary, RxAmerica, LLC. Both sides of Longs’ business would prove a huge tactical breakthrough for the 6,443-store drug powerhouse, giving it unquestioned superiority in West Coast drug store retailing, dominance in the Hawaii market it first entered this year, and a big infusion of new health plan members and corporate clients via the merger of RxAmerica with its own PBM operation, Walgreens Health Initiatives [WHI].

“We believe the combination of Walgreens and Longs is a highly compelling transaction that is superior to the pending transaction with CVS/Caremark,” asserted Walgreens chairman and chief executive officer Jeff Rein.

The merger “accelerates Walgreens’ expansion into high-growth markets and delivers meaningful cost synergies,” Rein added. In addition, the company noted in a statement, “The combination would provide substantial strategic and financial benefits, including strengthening Walgreens’ ability to serve customers in fast-growing markets, and broaden its presence in the highly attractive Hawaii market.”

Stating Walgreens’ case in the sudden tug-of-war for Longs, Rein noted, “We’ve completed six significant acquisitions in just over two years and have a proven track record of integrating companies to benefit our 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.”

In a letter to Longs chief executive officer Warren Bryant and the board of directors Sept. 12, Rein expressed confidence “that we will obtain all government approvals necessary for the transaction, including antitrust approval. He indicated that Walgreens was willing to “take those steps required to be taken to secure the necessary regulatory approvals” by agreeing to consider shedding a considerable number of Longs stores that may pose antitrust problems with federal regulators, “to the extent that such steps involved assets of Longs representing no more than 40 percent of Longs’ consolidated operating profit for the twelve-month period ending January 31, 2008.”

“As you are aware, Walgreens has had longstanding, sincere interest in Longs,” Rein told Longs’ board. “Walgreens has great respect for your company and its employees and believes there is significant strategic merit to a transaction.”

This isn’t the first time CVS has grappled with its competitors over big acquisition targets. In the 1990s, the chain acquired Twinsburg, Ohio-based drug store giant Revco D.S., prevailing with a $2.8 billion offer in early 1997 following the collapse of a merger attempt by Rite Aid over antitrust considerations. CVS also participated in other major takeover agreements that resulted in the piecemeal sharing of assets among several bidders, including acquisition deals for Eckerd Corp. that also involved the Jean Coutu Group, and Albertson’s, which was split among CVS, Supervalu and a private investment group.

In the wake of walgreens' bid, cvs extended its tender offer to purchase all of the outstanding common shares of Longs, at a price of $71.50 per share in cash, to Wednesday, Oct. 15. All other terms and conditions of the tender offer remain unchanged. 

Tom Ryan, chairman, president and chief executive officer of CVS Caremark, commented, “Our offer represents a full and fair price for Longs shares, and we stand firm on our price. Furthermore, the CVS Caremark’s offer has cleared all regulatory hurdles and provides certainty of completion to Longs shareholders.”