Walgreen's Deja Vu
By Monee Fields White
Crain's Chicago
October 6, 2008
Crain's Chicago
October 6, 2008
Just six months ago, Walgreen Co. CEO Jeffrey Rein appeared to make his final bid
to buy Longs Drugs Stores Corp., offering $70 a share to become the dominant
pharmacy chain in California.
The talks fell apart when the two sides couldn't agree on who would bear the risk of
regulators blocking the deal on antitrust grounds. Now Mr. Rein is back, offering an
even bigger price, $75 a share, or $2.8 billion, to wrest the chain's 524 stores and
more than $5 billion in annual sales away from archrival CVS Caremark Corp.
"It poses questions for investors why Walgreen walked away early and comes back
now," says Dan Poole, senior vice-president of equity research at National City
Private Client Group in Cleveland, which held 820,360 Walgreen shares as of June
30. "That doesn't inspire confidence."
With Walgreen facing increased competition and slower sales growth, Longs is
important to Mr. Rein and his expansion strategy, analysts say. Fourth-quarter sales
at Walgreen rose 8.8%, the smallest increase since 1977. Longs would give
Deerfield-based Walgreen a presence in several Western states and more heft in
California.
"It's important for Walgreen to do this," says Love Goel, chairman and CEO of Growth
Ventures Group, a Minnetonka, Minn.-based private-equity firm focused on retail.
"Walgreen is just trying to make sure that they are continuing to grow and have the
advantage."
The U.S. Federal Trade Commission has requested detailed information from
Walgreen about its presence in California and Hawaii and about mail-order traffic,
because Longs owns pharmacy-benefits manager RxAmerica. According to
regulatory filings, Longs says that roughly 63% of its Northern California drugstores
are within two miles of a Walgreens, prompting antitrust concerns over competition
issues.
Even with a lower bid of $71.50 a share, Pennsylvania-based CVS has the advantage
over Mr. Rein. Longs' board rejected his bid, citing the antitrust issues and the time it
would take to close a deal. Walgreen isn't "proposing to compensate Longs
stockholders for the delays in consummating a transaction," the filings say. Mr. Rein,
in a letter last month, says he's compensating shareholders for their wait by offering
a higher price than CVS, and he'll take his offer directly to Longs investors if
necessary.
"We think it's a superior proposal that should prompt Longs to allow us to conduct
due diligence on the transaction," a Walgreen spokesman says. Longs declines to
comment, deferring to the filing. Some analysts fear CVS will raise its price,
prompting Mr. Rein to increase his bid again.
"I hope they don't escalate the price and get into a bidding war with CVS because I
don't think it adds value for shareholders," says Stephanie Hoff, an analyst at Edward
Jones in St. Louis.
to buy Longs Drugs Stores Corp., offering $70 a share to become the dominant
pharmacy chain in California.
The talks fell apart when the two sides couldn't agree on who would bear the risk of
regulators blocking the deal on antitrust grounds. Now Mr. Rein is back, offering an
even bigger price, $75 a share, or $2.8 billion, to wrest the chain's 524 stores and
more than $5 billion in annual sales away from archrival CVS Caremark Corp.
"It poses questions for investors why Walgreen walked away early and comes back
now," says Dan Poole, senior vice-president of equity research at National City
Private Client Group in Cleveland, which held 820,360 Walgreen shares as of June
30. "That doesn't inspire confidence."
With Walgreen facing increased competition and slower sales growth, Longs is
important to Mr. Rein and his expansion strategy, analysts say. Fourth-quarter sales
at Walgreen rose 8.8%, the smallest increase since 1977. Longs would give
Deerfield-based Walgreen a presence in several Western states and more heft in
California.
"It's important for Walgreen to do this," says Love Goel, chairman and CEO of Growth
Ventures Group, a Minnetonka, Minn.-based private-equity firm focused on retail.
"Walgreen is just trying to make sure that they are continuing to grow and have the
advantage."
The U.S. Federal Trade Commission has requested detailed information from
Walgreen about its presence in California and Hawaii and about mail-order traffic,
because Longs owns pharmacy-benefits manager RxAmerica. According to
regulatory filings, Longs says that roughly 63% of its Northern California drugstores
are within two miles of a Walgreens, prompting antitrust concerns over competition
issues.
Even with a lower bid of $71.50 a share, Pennsylvania-based CVS has the advantage
over Mr. Rein. Longs' board rejected his bid, citing the antitrust issues and the time it
would take to close a deal. Walgreen isn't "proposing to compensate Longs
stockholders for the delays in consummating a transaction," the filings say. Mr. Rein,
in a letter last month, says he's compensating shareholders for their wait by offering
a higher price than CVS, and he'll take his offer directly to Longs investors if
necessary.
"We think it's a superior proposal that should prompt Longs to allow us to conduct
due diligence on the transaction," a Walgreen spokesman says. Longs declines to
comment, deferring to the filing. Some analysts fear CVS will raise its price,
prompting Mr. Rein to increase his bid again.
"I hope they don't escalate the price and get into a bidding war with CVS because I
don't think it adds value for shareholders," says Stephanie Hoff, an analyst at Edward
Jones in St. Louis.
