CVS Caremark to Swallow Longs Drugs for $2.9B

WALNUT CREEK, CA-Locally headquartered Longs Drug Stores Corp. has agreed to be acquired by CVS Caremark Corp. of Rhode Island for $2.9 billion cash and assumed debt, or $71.50 per share, 32% higher than the company’s closing share price Tuesday. CVS Caremark plans to finance the acquisition with a $1.5 billion bridge loan facility, together with existing cash and liquidity.

CVS, the industry leader, has 6,300 stores and annual revenue of approximately $85 billion. Longs, which generates approximately $5.3 billion in annual revenues, has 521 retail drug stores in California, Hawaii, Nevada and Arizona, including 490 stores in Central and Northern California and Hawaii where Longs is a leading player and where CVS is not currently represented. All told, Longs’ portfolio includes stores in 10 non-CVS markets that are among the top 100 drugstore markets in the country.

CVS chief executive Tom Ryan told analysts shortly after the announcement that given the extraordinary cost and complexity of site selection in major markets in Northern California and Hawaii it would take CVS at least 10 years to otherwise assemble the same portfolio, which would give it leading positions in markets such as San Francisco, San Jose, Oakland, Sacramento, and Honolulu. The deal also includes 24 stores in Nevada, which would give the company instant leadership in Reno, a market that is forecast to grow at twice the national average, and where CVS currently has only three stores.”We entered California organically in 2004 and then quickly acquired 335 Save-On stores [in Southern California]; now [we stand to be] the leading player in Central and Northern California and Hawaii,” he told analysts. “From when we entered California, in just four years we will have more than 830 stores in the state, more than anybody else.”Another very attractive part of the deal for CVS is that Longs owns more than 200 of its properties–the stores plus three distribution centers and its headquarters–located in markets where commercial real estate values are among the highest in the country and where prime locations are especially difficult to acquire. CVS “conservatively” estimates the value of the owned properties at more than $1 billion. Ryan told investors that CVS will be “monetizing a substantial portion of these assets over time” through sale-leasebacks. CVS’ $1-billion estimation of the value of Longs owned portfolio is based on an assumption that it will be able to sell the building at a certain cap rate it declined to disclose, but said that on recent sale-leaseback transactions it has been achieving cap rate of between 6.5% and 7.5%.