CVS to buy west coast chain

August 12, 2008 6:25:26 PM PDT
Drug store chain CVS Caremark Corp., looking to build its West Coast presence, said Tuesday it would buy Longs Drug Stores Corp. in a deal valued at $2.7 billion. The $71.50 per-share cash offer, announced after the end of trading Tuesday, was a 32 percent premium over Walnut Creek, Calif.-based Longs' closing price of $54.04.

Longs' shares soared 30 percent, or $16.21, to $70.25 in after-hours trading.

Including the assumption of the chain's roughly $200 million in debt, the deal is valued at about $2.9 billion.

Executives at Woonsocket, Rhode Island-based CVS said the acquisition will give the nation's largest provider of prescriptions significant inroads in fast-growing West Coat markets where property is often unavailable or expensive to acquire.

"Geographic reach has become a more important thing for us," CVS Chief Financial Officer David Rickard told The Associated Press in an interview. "CVS has always wanted to be in good markets that grow, and if you look at population centers of the United States, we're in most of them. ... This directly addresses the central and northern California markets and gives us access to those consumers."

The deal is expected to close in the fourth quarter.

Longs operates 521 drugstores - mostly in California - but also has sites in Hawaii, Nevada and Arizona. The company also owns Rx America, a prescription benefits management program with more than 8 million members.

CVS executives said building such a portfolio could take the pharmacy chain a decade to complete, while spending hundreds of millions to acquire on property.

"These are highly attractive regions of the country, where we are not currently represented," CVS Chairman and Chief Executive Tom Ryan told investors during a conference call. "And they are very difficult real estate markets to penetrate."

The Longs stores in the continental United States will be converted to the CVS brand in 2009, while sites in Hawaii will retain the Longs' name for the foreseeable future.

After the acquisition is completed, CVS will operate 6,800 drugstores in 41 states and the District of Columbia.

"Given our changing industry landscape, we believe this combination is the logical step for our company," said Warren F. Bryant, Chairman and Chief Executive Officer of Longs.

Longs' stock has climbed since the spring amid speculation the company would seek an outright sale or alternatives for its real estate portfolio.

During the second quarter, the company's same-store sales fell 1.1 percent as more generic drugs flooding the market ate into profits. Meanwhile, total sales increased 0.5 percent to $1.2 billion.

Year-to-date, Longs said its same-store sales declined 0.1 percent, but total sales increased 1.7 percent.

CVS shares fell 49 cents, or 1.3 percent, to $38.05 in trading Tuesday, before falling $1.67, or 4.4 percent, to $36.38 in after-hours activity.