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Industry shocker: CVS buys Longs

BY Antoinette Alexander

WOONSOCKET, R.I. CVS Caremark, which is no stranger to acquisitions, is acquiring Longs Drug Stores’ 521 retail locations in California, Hawaii, Nevada and Arizona, as well as its PBM services, for $2.9 billion in cash. Following the acquisition, CVS Caremark will fill or manage more than 1.2 billion prescriptions per year and will operate approximately 6,800 drug stores in 41 states and the District of Columbia.

CVS Caremark plans to finance the acquisition with a $1.5 billion bridge loan facility, together with existing cash and liquidity. The transaction, which is subject to review under the Hart-Scott-Rodino Act and has other customary closing conditions, is expected to be completed in fourth-quarter 2008.

As part of the deal, which is for $71.50 per share in cash, CVS Caremark will bolster its already strong PBM business by acquiring Longs’ Rx America subsidiary, which offers prescription benefit management services to more than 8 million members and prescription drug plan benefits to approximately 450,000 Medicare beneficiaries.

“We believe this transaction has compelling benefits for CVS Caremark and advances our long-term strategy in important ways,” Tom Ryan, CVS chairman, president and chief executive officer, told analysts in a conference call to discuss the deal. “First and foremost, the acquisition accelerates our expansion into Central and Northern California and Hawaii. These are highly attractive regions of the country where we are not currently represented and they have very difficult real estate markets to penetrate. Second, with the addition of these markets, we will now have filled some very important markets that will be particularly valuable to our PBM clients as we roll out our new Proactive Pharmacy offering. Lastly, Longs’ successful PBM, Rx America, and its stand alone PDP business will complement our Caremark business.”

More than 490 of the stores CVS Caremark is acquiring are located in the Central and Northern California and Hawaiian markets, where Longs is a leading player. According to Ryan, the stores in the Hawaiian market will continue to operate under the Longs name as Hawaiians view Longs as a “home grown chain.”

Ryan said that about 470 of the stores it is acquiring average roughly 22,000 to 23,000 square feet in size. The remaining Longs stores are smaller in size and range between 4,000 to 7,000 square feet, and are located namely in or near medical centers and, according to Ryan, represent an opportunity for specialty pharmacy locations.

Meanwhile, Longs’ PBM business, which will complement the Caremark business, generates about $380 million in annual revenues, including the PDP lives, said Ryan.

Longs owns the real estate associated with approximately 200 store locations, three distribution centers and three office facilities. CVS Caremark has “conservatively” valued the store locations alone at more than $1 billion. These stores are located in markets where commercial real estate values are among the highest in the country and prime locations are especially difficult to acquire. CVS Caremark has stated that it intends to “unlock the intrinsic value of these locations, as well as the distribution centers and office facilities, by monetizing a substantial portion of these assets over time.”

For CVS, such an undertaking is par for the course. Historically, CVS has grown through acquisition over the years including 2,000 stores from Revco, 240 stores from Arbor Drugs and, more recently, some 1,260 Eckerd stores and 700 standalone Sav-on and Osco drug store from Albertsons. Not to mention the acquisitions of retail-clinic operator MinuteClinic and pharmacy benefit manager Caremark.

Commenting on the deal, Warren Bryant, chairman, president and chief executive officer of Longs, told analysts, “We see today’s announcement as a very natural step for Longs. It is our founding in 1938, our great people at Longs and our strong connection to our customers that have been our key assets to the drivers of our success. … In the past five years, we have made the company stronger and more productive and more profitable. We have reduced our overhead, improved our processes, upgraded our stores and focused on our product offerings. Over the last four years, our Rx America subsidiary has delivered 93 percent compound annual growth and has become a significant competitor in the Medicare Part D space. As a result of both our PBM and retail initiatives, Longs has experienced a tripling of our operating margins in just three years.”

Longs generates annual revenues in excess of $5 billion and reported EBITDA in the last 12 months of approximately $276 million. Assuming completion of the transaction in the fourth quarter of 2008, the acquisition is expected to be dilutive to earnings per share in the first year, and accretive to EPS beginning in 2010. CVS Caremark expects to achieve cost synergies of approximately $100 million in 2009 and approximately $140 million to $150 million in 2010, resulting from purchasing efficiencies and a reduction of SG&A expense.

The acquisition will be effected through a tender offer to be launched shortly by a subsidiary of CVS Caremark for all outstanding Longs shares. The tender offer will be subject to, among other things, the condition that at least two-thirds of the outstanding Longs shares are tendered.

Lehman Brothers and Deutsche Bank served as financial advisors to CVS Caremark on this transaction and provided the bridge loan commitment. Davis Polk & Wardwell and Mintz Levin Cohn Ferris Glovsky and Popeo P.C. served as legal advisors to CVS Caremark. J.P. Morgan Securities Inc. served as financial advisor to Longs and Wachtell, Lipton, Rosen & Katz served as its legal advisor.

“We are excited about this transaction and are focused, as always, on having a smooth and seamless integration. We have done quite a few of these over the years and we have good deal of experience to know what it takes to achieve a smooth transition and we plan to do it here again without taking our eyes off the ball at CVS Caremark,” said Ryan. “We expect to have all stores integrated in 2009 and we have already selected our integration team and its leadership and we have plans underway and are ready to hit the ground running once the deal closes.”

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Winn-Dixie credits IT for help with financial turnaround

BY Drew Buono

JACKSONVILLE, Fla. After filing for bankruptcy, Winn-Dixie’s is back in the black, due in part to its information technology operations, according to Computerworld.

“I think it fundamentally contributed to the bankruptcy,” said Charles Weston, group vice president on information technology at Winn-Dixie, of the IT systems. The applications were fragmented, and a single job by an employee could involve logging onto five separate screens, he said.

Weston faced fundamental decisions concerning the direction of IT, including whether he should stick with the mainframe or move to a distributed environment for his core business systems. He decided to stay with the mainframe and upgrade to a System z9, by IBM, mainframe in late 2006. He rejected a decentralized approach, which would involve relying on clusters of servers to replace the mainframe, after analyzing the cost and technology involved in the two approaches.

Weston admitted that cost cutting following the bankruptcy reduced his IT staff by more than a third, but pointed out that since restructuring, his department has become an attractive as a place to work because of the effort. The company exited bankruptcy in 2006 and expects to report net income of $13 million for its latest fiscal year, which ended in June. Total sales for the year are expected to come in at nearly $7.3 billion.

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Spartan Stores names new ceo

BY Antoinette Alexander

GRAND RAPIDS, Mich. Spartan Stores, a grocery distributor and operator of 84 retail supermarkets in Michigan, has named Dennis Eidson chief executive officer, effective Oct. 15.

Craig Sturken will continue in his role as executive chairman of the board. Until his transition to president and chief executive officer, Eidson will continue in his current role as a board member, president and chief operating officer.

“For the past 24 months, our board has been engaged in chief executive officer succession planning,” stated Sturken. “I have worked with our board to assess our critical leadership needs and to ensure that we selected the right individual to lead us through our future growth stages.”

Eidson joined the company in March 2003 as executive vice president of marketing and merchandising. In October 2007, he was appointed to the board of directors and as a company president, following his appointment in February 2007 as executive vice president and chief operating officer.

Prior to joining Spartan Stores, he was divisional president and chief executive of the Great Atlantic and Pacific Tea Company’s Midwest region, and assistant general manager for Nash Finch’s Michigan operations.

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