Can Longs Buyout Save Drug Store Sector? (LDG, CVS, RAD, WAG)

Longs Drug Stores Corporation (NYSE: LDG) is trading way up this morning after last night’s announcement that CVS Caremark Corporation (NYSE: CVS) will acquire the company.  In a definitive agreement reached, Longs will receive $71.50 per share in cash in the buyout.  After the assumption of debt and items, this buyout is valued at roughly $2.9 Billion.

CVS Caremark is getting 521 retail drugstores located in California,Hawaii, Nevada and Arizona as well as (and perhaps more important) theRx America subsidiary.  Rx America offers prescription benefitsmanagement services to more than 8 million members and prescriptiondrug plan benefits to approximately 450,000 Medicare beneficiariesthroughout the US.

Longs has annual revenues of over $5 billion and this merger completionis expected in the fourth quarter of 2008.  The deal is set to bedilutive to earnings in the first year and accretive to EPS beginningin 2010. CVS Caremark expects to achieve significant cost synergies ofapproximately $100 million in 2009 and approximately $140-$150 millionin 2010.

Caremark has been a great winner over the last few years and has beenrange-bound over the last 12 months.  While Longs was already close to a52-week high, this represents an all-time high back into the 1980’s.

This merger also has shares of the troubled Rite Aid Corp. (NYSE: RAD)up at $1.40 after closing at $1.28 yesterday.  Its shares have beentroubled for longer than anyone would care to recall, and we won’t evenspeculate at what price it would require from a buyer for "long andwrong" buried stock holders to approve a deal there if it was even made.

Walgreen Co. (NYSE: WAG) is indicated down slightly at $37.00 as it isdeemed as now being behind CVS on the deal curve.  That stock isalready way down from highs north of $50.00 and up until the recentmoves it could be called dead money for the last 5-year period.

Jon C. Ogg
August 13, 2008