WOONSOCKET and WALNUT CREEK, Calif. – CVS Caremark Corp. (NYSE: CVS) has agreed to acquire retail and pharmacy benefits management (PBM) company Longs Drug Stores Corp. (NYSE: LDG) for $2.9 billion in cash and debt, the companies said in a joint announcement.
The deal includes Longs’ 521 retail drugstores in Arizona, California, Hawaii and Nevada, as well as the chain’s RxAmerica LLC subsidiary that offers PBM services to more than 8 million members and prescription-drug plan benefits to about 450,000 Medicare beneficiaries.
“This transaction provides tremendous benefits to CVS Caremark by accelerating our expansion in very attractive drugstore markets and strengthening our geographic reach,” Chairman, President and CEO Thomas M. Ryan said in a statement late yesterday. “In fact, Longs has a significant presence in 10 non-CVS markets that are among the top 100 drugstore markets in the country.
“More than 490 of the stores we are acquiring are located in the Central and Northern California and Hawaiian markets, where Longs is a leading player. Longs’ store network in these regions is excellent and is one that would take a decade or more for us to replicate through organic growth,” he said.
“With this acquisition, we will increase accessibility to our pharmacies for consumers and put us in an even better position to grow our new Proactive Pharmacy Care offerings with our PBM clients,” Ryan added. “We are very excited about the potential offered by this combination … and we expect this integration to be seamless.”
The acquisition would bring total prescriptions filled or managed by CVS Caremark to more than 1.2 billion prescriptions per year, and grow its CVS/pharmacy retail division to about 6,800 drugstores in 41 states and the District of Columbia.
Longs also owns the real estate associated with about 200 stores, three distribution centers and three offices, “in markets where commercial real estate values are among the highest in the country and prime locations are especially difficult to acquire,” the companies noted.
CVS “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,” company officials said. The store locations alone have been “conservatively valued” by CVS at more than $1 billion, they added.
“The transaction represents an excellent opportunity for Longs to deliver significant and certain value to its shareholders while positioning its stores to thrive in the future,” said Warren F. Bryant, chairman, president and CEO of the California-based chain.
“Over the course of the last five years, we have transformed Longs into a stronger, more productive, more profitable company,” he said. For the 12 monts ended May 1, the company posted earnings before interest, taxation, depreciation and amortization of about $276 million on revenue of $5.4 billion.
“Given the changing industry landscape, we believe this combination is the logical next step for Longs,” Bryant said. He cited CVS Caremark’s “strong record of successfully integrating drug store chains and pharmacy benefit services into its portfolio, and working with employees to strengthen the performance, format and offerings of stores.”
The acquisition is expected to close in the fourth quarter, pending regulatory and other customary approvals.
The purchase “will be effected through a tender offer to be launched shortly by a subsidiary of CVS Caremark for all outstanding Longs shares,” at a price of $71.50 per share, the companies said. Among other conditions, at least two-thirds of outstanding Longs shares must be tendered. CVS also would assume Longs’ debt.
Money for the purchase would come from existing cash, a $1.5 billion bridge loan and commercial paper, CVS said. The company reported $9.4 billion in outstanding debt as of the end of the second quarter on June 28.
The Woonsocket company predicted the acquisition would boost earnings per share starting in 2010. The company “expects to achieve significant cost synergies of approximately $100 million in 2009 and approximately $140 to $150 million in 2010, resulting from purchasing efficiencies and a reduction of SG&A expense.”
Shortly after the announcement last night, Fitch Ratings affirmed CVS Caremark’s bond rating of “BBB+,” rating outlook stable.
“The ratings continue to reflect the company’s scale and strong brand recognition, leading market shares and operating metrics, its successful track record of integrating acquisitions, as well as the recession-resistant nature of drugstore retailing,” Fitch said. After the acquisition, the ratings agency “expects CVS Caremark to reduce its commercial paper balances and pay down its bridge facility over the next 12 to 18 months through strong free-cash-flow generation at both its retail and pharmacy services businesses.”
CVS Caremark Corp. (NYSE: CVS) – the nation’s largest provider of prescription medications – operates the CVS/pharmacy stores; the CVS.com online pharmacy; Caremark Pharmacy Services; and the MinuteClinic retail-based health care subsidiary. Additional information is available at investor.cvs.com.
To learn more about Walnut Creek, Calif.-based Longs Drug Stores Corp. (NYSE: LDG) and its RxAmerica LLC pharmacy benefit management subsidiary, visit www.longs.com or www.RxAmerica.com.
