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Hurdles for Walgreens could tilt Longs balance in CVS’ favor

BY Antoinette Alexander

NEW YORK Investors were taken by surprise Friday evening when Walgreens stepped in with an offer to snap up Longs Drug Stores for $75 per share—a 5 percent premium to CVS Caremark’s bid. Now that the dust has begun to settle, some industry observers are expressing concern that such a deal could represent regulatory hurdles for Walgreens and result in substantial store divestitures.

As previously reported by Drug Store News, Walgreens stepped in with an unsolicited 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—which is no stranger to acquisitions—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.

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 has raised the eyebrows of several industry analysts.

“Walgreens has significant overlap with Longs and the transaction would result in combined market share greater than 50 percent in 20 of the 33 markets in which Longs operates. We estimate that the company could be required to divest up to 10 percent to 15 percent of Longs stores,” stated Credit Suisse analyst Edward Kelly in a recent research note. Kelly predicts that divestitures could reduce gross synergies by $30 million to $40 million.

Furthermore, Walgreens would be required to pay—if the deal were successful—a $115 million breakup fee related to CVS’ proposed offer.

Commented Morgan Stanley analyst Mark Wiltamuth in a research note, “As with the CVS offer, we believe this transaction would be modestly dilutive to near-term EPS for Walgreens, but the Walgreens’ deal (and dilution economics) faces the added uncertainty of significant store divestitures that may be required to satisfy antitrust regulators.” Wiltamuth stated in the note that “CVS could have the advantage in bidding for Longs as it does not face the problem of store divestitures” and has passed Hart-Scott-Rodino regulatory hurdles. On Sept. 5, the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act expired, satisfying a condition to the closing of CVS’ offer.

Wiltamuth noted that, in a letter to Longs, “Walgreens has set an upper limit of store divestures totaling up to 40 percent of Longs’ operating profit. We assume this would be a worst case scenario, but it is indicative of the potential size of the divesture required.” Echoing the sentiment, SunTrust Robinson Humphrey analyst David Magee stated in a research note, “If Walgreens is successful, it will most likely have to close more stores than CVS. Of the top 14 markets in California, totaling some $30 billion in sales, we estimate that there is serious overlap in about one-third of the markets. So, given that Longs has about 450 of its 500 stores in that state, there are roughly 150 stores in those areas of major overlap. Going further, perhaps up to 75 of those stores (or 15 percent of the overall Longs chain) could be considered candidates for closure.”

The news of the Walgreens bid has also sparked speculation as to whether CVS will sweeten its offer even though Tom Ryan, chairman, president and chief executive officer of CVS, maintains that it will “stand firm on our price.”

Following the news of Walgreens’ bid, Standard & Poor’s Ratings Services announced on Monday that it placed its ratings on Walgreens, including the ‘A+’ corporate credit and ‘A-1’ short-term ratings, on CreditWatch with negative implications.

“The CreditWatch placement reflects Walgreen’s more aggressive financial policy, the expected increase in debt leverage to fund the acquisition, and its limited track record in integrating large acquisitions,” explained S&P credit analyst Ana Lai.

Also on Monday, as Drug Store News reported, S&P’s Rating Services stated that Walgreens’ competing higher offer has no effect on CVS’ ratings.

“Although it is uncertain whether CVS will make a revised offer for Longs, an upsized offer funded with incremental debt that results in total debt to EBITDA increasing to pro forma debt leverage of over 3.4x from 3.2x currently could result in an outlook revision to negative. However, this would require a significant amount of additional debt and we do not view this as likely,” S&P stated.

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Winn-Dixie lets customers make donations for hurricane victims

BY Michael Johnsen

JACKSONVILLE, Fla. Winn-Dixie Stores on Monday announced that customers can help their neighbors affected by the 2008 hurricane season by donating at any neighborhood Winn-Dixie.

“Our neighbors face a long and difficult recovery process, and we want to do everything we can to help them,” stated Terry Grooms Derreberry, Winn-Dixie manager of corporate giving. “Our hearts go out to those who were impacted by these storms.”

Winn-Dixie is implementing its “Neighbors Helping Neighbors” program in all of its 521 stores as a way to assist the American Red Cross, which has seen its Disaster Relief Fund depleted after an active year of disasters, the company stated.

Winn-Dixie customers will find “Neighbors Helping Neighbors” donation sheets available at all registers, where they can donate an amount between 50 cents and $500 directly to the American Red Cross. The cashier will scan the Neighbors Helping Neighbors donation sheet, which automatically adds the amount designated by the customer to the total bill.

The Red Cross provided food, shelter, counseling and other assistance to the communities affected by the storms that battered Florida and the Gulf Coast during the past month. Similar efforts across the country have forced the Red Cross to launch a national drive to raise $100 million to keep the Disaster Relief Fund afloat.

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CVS’ Ryan to lead search for URI president

BY Antoinette Alexander

PROVIDENCE, R.I. CVS Caremark chairman, president and chief executive officer, Tom Ryan, will lead the search for the next president of the University of Rhode Island.

According to local news reports, Robert Carothers, president of URI, announced on Monday that he will step down at the end of the current school year after 18 years of service.

Ryan, a URI alumnus, will head the search committee to select the next URI president. An initial list of candidates is expected to be handed to the search committee at the beginning of 2009, with a final decision expected from the Board of Governors at its meeting in May or June.

According to reports, the search committee includes, besides Ryan, R.I. Board of Governors for Higher Education members Thomas Rockett, Brenda Dann-Messier and Daniel J. Ryan; Frank Annunziato, executive director of the URI chapter of the American Association of University Professors; Wendy Roworth, art professor; Celest Martin, associate professor in the writing program and chairwoman of the URI Faculty Senate; and Jim Miller, an ocean engineering professor. Also sitting on the committee are Brandon Brown, a student representative; Winifred Brownell, URI dean of arts and sciences; Thorr Bjorn, athletic director; Domingo Morel, academic adviser for URI’s talent development program; Michael Fascitelli, a URI alumnus; and Saul Kaplan, executive director of the R.I. Economic Development Corporation (EDC).

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