CVS to Acquire Longs Drugs for $2.9B

In one of the year’s notable retail acquisition announcements, Longs Drug Stores Corp. has agreed to be acquired by Woonsocket, R.I.-based CVS Caremark for $2.9 billion or $71.50 per share. The purchase price includes the assumption of Longs’ outstanding debt. CVS will fund the all cash deal with $1.5 billion in debt and existing cash and liquidity. Under the terms of the deal, CVS will acquire the Walnut Creek, Calif.-based Longs’ 521 retail drugstores in California, Hawaii, Nevada and Arizona as well as its Rx America subsidiary, which offers prescription benefits management (PBM) services to more than 8 million members and prescription drug plan benefits to approximately 450,000 Medicare beneficiaries. More than 490 of the Longs stores are located in the central and northern California and Hawaiian markets, where Longs is a leading player. In a prepared statement, Tom Ryan, chairman, president and CEO of CVS said that it would take CVS a decade or more to replicate those Longs’ networks through internal growth. Significantly, Longs owns the real estate associated with approximately 200 store locations, three distribution centers and three office buildings. CVS Caremark has conservatively valued the store locations alone at more than $1 billion. These stores have prime locations in markets with some of the highest commercial real estate values in the country. CVS plans to monetize a substantial number of these assets over time. The combined companies, to be called CVS Caremark, will fill or manage 1.2 billion prescriptions per year, operate approximately 6,800 drugstores in 41 states and the District of Columbia and generate $90 billion in revenues per year (CVS annual revenues of $85 billion plus Longs annual revenues of $5 billion). Plans call for the transaction to be completed in the fourth quarter. If that happens, the companies have calculated that the acquisition will dilute earnings per share (EPS) during 2009 and contribute to EPS in 2010 thanks to significant cost synergies. Estimates call for approximately $100 million in savings in 2009 and $140 to $150 million in 2010. The savings will come from purchasing efficiencies and reduced expenses.