Longs directors to Walgreens: "No Thanks"

WALNUT CREEK, Calif. Walgreens’ unsolicited bid to acquire Longs Drug Stores has stalled as Longs’ board of directors has decided not to enter discussions with Walgreens. Furthermore, the board continues to urge its stockholders to accept the tender offer by CVS Caremark.

As previously reported by Drug Store News, Walgreens stepped in late Friday with an unsolicited, non-binding bid to buy Longs for nearly $3 billion in cash and debt assumption, a move that aims to quash a takeover agreement Longs management had already approved with CVS.

CVS announced in mid-August that it plans to buy for $2.9 billion, including debt, Longs’ 521 retail locations in California, Hawaii, Nevada and Arizona, as well as its PBM services. On Sept. 5, the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act expired, satisfying a condition to the closing of CVS’ offer.

While Walgreens’ offer, which is subject to regulatory approvals and the completion of due diligence, represents a $3.50 per share premium over the cash purchase price to be paid to Longs shareholders under the proposed acquisition by CVS, the bid from Walgreens immediately raised the eyebrows of several industry analysts given the likely regulatory hurdles and the potential for substantial store divestitures. It is apparent that Longs management also has its share of concerns.

“After carefully considering your expression of interest with our outside financial and legal advisors, our board of directors determined not to furnish information to, nor have discussions and negotiations with, Walgreens,” stated Warren Bryant, Longs chairman, president and chief executive officer, in a letter sent to Jeff Rein, Walgreens chairman and chief executive officer.

In response to the letter, Walgreens issued a statement that read: “We are disappointed with the refusal of the Longs board to discuss our superior proposal. Longs stockholders and the marketplace as a whole have demonstrated strong support for a transparent and fair process that more fully values the company. We remain committed to pursuing our proposal, which we believe creates superior value for our respective stockholders.”

According to the letter, Longs management considered, among other things:

  • Walgreens previously reviewed the potential for a transaction with Longs and was not and is not now proposing to accept inherent regulatory risks.

  • Walgreens has not presented a clear roadmap to completion. Assuming that regulatory approvals could be obtained, Longs’ management estimates the approval process could take nine to 12 months.

  • Walgreens is not proposing to compensate Longs stockholders for delays in consummating a transaction. Meanwhile, CVS Caremark has already obtained all required regulatory approvals.

  • Walgreens assumes limited antitrust risk and does not provide comparable certainly of consummation to the CVS transaction.

“Your proposal to divest Longs stores (and not Walgreens stores) representing up to 40 percent of Longs’ consolidated operating profit does not provide Longs stockholders with the certainty of consummation presented by the CVS Caremark transaction ... Walgreens is second only to Longs in the number of pharmacy counters operated in Northern California and approximately 63 percent of Longs’ mainland counters are within two miles of a Walgreens’ location,” Bryant stated in the letter. “Walgreens has also announced its intention to aggressively expand it presence in Hawaii, an area where Longs is currently the largest operator of pharmacy counters by a wide margin. Longs’ consolidated operating profit for fiscal 2008 was $164.6 million; accordingly 40 percent of that number is $65.8 million. After consulting with our outside counsel, we estimate that the operating profit of the stores at risk for divestiture could easily exceed this number by a substantial margin, assuming a transaction is approvable.”

  • Walgreens’ bid is non-binding, conditioned on diligence and is not financed.

“Accordingly, our board of directors has determined that it is not in the best interests of Longs and its stockholders to furnish information to, nor have discussions and negotiations with, Walgreens and the board has determined to continue to recommend to its stockholders that they accept the tender offer by CVS Caremark and tender their shares of Longs in that tender offer,” stated Bryant.

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