CVS to Buy Longs Drug For About $2.6 Billion

CVS to Buy Longs Drug For About $2.6 Billion

CVS Caremark Corp. agreed to buy Longs Drug Stores Corp. for about $2.6 billion, a move that will expand the company's footprint in California, Nevada and Hawaii.

The move is the latest in an acquisition strategy that has catapulted CVS over Walgreen Co. to become the biggest drugstore chain in the country by number of stores, and one of the largest retailers of any kind. The takeover will give CVS, of Woonsocket, R.I., 6,800 drugstores in 41 states.

With its acquisition of Caremark last year, CVS also became a major player in the prescription benefits-management business. One of the factors that attracted CVS to Longs was the West Coast company's pharmacy benefit-services unit, RxAmerica.

The RxAmerica unit posted revenue of $187 million in the first quarter ended May 1, up 67% from $112 million in the same quarter a year earlier. RxAmerica manages prescription benefits for eight million people and offers prescription plans for 450,000 Medicare beneficiaries this plan year, almost double the previous plan year.

CVS will pay $71.50 a share for each Longs share -- a 32% premium to its 4 p.m. closing price of $54.04 on the New York Stock Exchange. The deal was announced after the close of regular trading. Longs had fallen $1.07, or 1.9%, in composite trading Tuesday. CVS fell 49 cents, or 1.3%, to $38.05, also on the Big Board. In after-hours trading, CVS's shares fell 4.4%, to $36.38.

For the fiscal year ended Jan. 31, Longs posted revenue of $5.26 billion and net income of $96.2 million. For the year ended Dec. 29, CVS had net income of $2.64 billion on revenue of $76.33 billion.

The Longs purchase gives CVS a presence in markets where it has been weak, most notably in northern California and Hawaii. The 521 retail locations it will acquire as part of the deal also include stores in Nevada and Arizona.

Also attractive to CVS is Longs' real estate. The company owns 200 of its store locations as well as three office facilities. CVS said it has valued the real-estate holdings at more than $1 billion and indicated it plans to monetize assets over time.

The deal is subject to antitrust review. With the purchase, CVS said it will manage or fill 1.2 billion prescriptions a year. Last year, according to health-care data company IMS Health, about 3.8 billion prescriptions were dispensed in the U.S.

The acquisition will more than double the number of locations the company has in California -- from 382 at the end of last year to 829 after the deal. Just two years ago, CVS barely had a presence in California. That changed when the company bought the Sav-On chain of stores from Albertson's Inc. in 2006.

In a conference call, CVS Chief Executive Thomas Ryan said the Los Angeles area is a top revenue generator for the company. He also said CVS wouldn't follow a cookie-cutter approach to operating its West Coast stores. Although the Longs stores in California will eventually be renamed as CVS stores, he said a West Coast-based merchandising team will make local decisions on stocking the stores.

"We are not going to just go in and put a Boston CVS in San Francisco," he said.

The Hawaii stores acquired by CVS will continue to operate under the Longs name, Mr. Ryan said.

The purchase of Longs, of Walnut Creek, Calif., could put more pressure on Walgreen. Walgreen last month said that it planned to slow its rate of store growth for several years, reversing a strategy of rapid expansion. Walgreen operates 6,356 drugstores in every state but Alaska, where it plans to open stores next year.

CVS said it expected the deal to be completed in the fourth quarter. Including assumed debt, CVS valued the purchase at $2.9 billion.

CVS said it expects to achieve cost savings of $100 million in 2009 and about $140 million to $150 million in 2010. The deal will be financed in part by a $1.5 billion bridge-loan facility.