In addition to the real estate and inventories, the deal also includes Longs' Rx America subsidiary, which offers prescription benefits management services to over 8 million members and prescription drug plan benefits to approximately 450,000 Medicare beneficiaries. CVS says it expects to achieve cost synergies of approximately $100 million in 2009 and approximately $140-$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. CVS Caremark plans to finance the acquisition with a $1.5 billion bridge loan facility, together with existing cash and liquidity. The transaction is expected to be completed in the fourth quarter of 2008. If the deal goes through, CVS will operate approximately 6,800 drugstores in 41 states and the District of Columbia, and will fill or manage more than 1.2 billion prescriptions per year.

Ryan told analysts that $300 million has been allotted for remodeling the Longs stores in 2009 and 2010. Despite the strong Long's brand, he said the stores in California and Nevada would be converted to the CVS brand "over time" while the stores in Hawaii will not be converted. "Hawaii is kind of a stand-alone market from a distribution standpoint and an advertising standpoint so you don't lose economies of scale by [not changing the branding]," he said. "In fact, we believe that Hawaiians feel that Longs is kind of a homegrown chain."

In the 2008 fiscal year Longs closed all 23 of its locations in Washington, Oregon and Colorado along with eight stores in California. In the 2009 fiscal year, it had been planning to open or relocate approximately 20 to 30 stores and remodel an additional 40 stores.

As part of the integration of the Longs chain into CVS, Ryan said CVS will look to relocate 10% to 15% of the Longs stores in Northern California that aren't already well-located to freestanding locations "if we can find them, but there's no rush," he said. In addition, he said CVS would look to learn a little something from Longs about its general merchandise business, which accounts for more of the stores' overall sales than CVS stores, and use that to improve operations at its existing CVS stores in California.

Lehman Brothers and Deutsche Bank are serving 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.

Instant Insights /

CVS Caremark to Swallow Longs Drugs for $2.9B

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