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CVS, Walgreen Both Go Longs


But acquisition of competitor seems ill-timed, overpriced.


On Friday, drugstore chain Walgreen (WAG) offered $75 per share for Longs Drug Stores (LDG), a California-based retailer.

This looks like a bonanza for Longs shareholders After all, the offer comes on the heels of a $71.50 per share bid made by industry stalwart CVS (CVS) in August. I'd also point out that both offers are a country mile north of the low-to-mid $40 range Longs' shares were trading at just a couple of months ago.

So which company will win?

Frankly, it's too early to tell. However, Walgreen seems the one to beat, having bested CVS's offer by a few bucks: Advisory Research Inc., Longs' largest shareholder, said it wouldn't sell its shares to CVS because "the offer price [was] too low and Longs failed to fully value its own assets in the transaction."

But why now? Consumers don't seem to be spending a lot of money these days, and there's a lot of competition for what those in the drugstore biz call "front-end" merchandise (meaning the stuff at the front of the store, like hair gel and gum.) In other words, shouldn't both of these players be spending their time shoring up their existing businesses, and only go hunting for new acquisitions when the retail market perks up a bit?

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I realize that some may take the opposite view, saying that now is the time to get a competitive advantage. But times are tough, and swallowing a roughly $3 billion fish (which is what Walgreen is reportedly offering, including debt) is no easy task.

My next question: Why are CVS and Walgreen seemingly offering so much?

CVS trades at about 0.64 times sales, 1.65 times book value, and 15.2 times the current year earnings estimate. Meanwhile, Walgreen trades at about 0.63 times sales, 2.9 times book and 16.5 times the current year estimate.

And Longs? On Friday, the stock closed at $71.66; it now trades at about 0.48 times sales, 3.02 times book and 23.34 times the current-year estimate.

Now don't get me wrong - I'm not saying that Longs isn't attractive – its footprint in
California is an enviable one, and it has a good name. But why should Longs enjoy a higher valuation than CVS or Walgreen?

Put another way: At $3 billion, the deal values each Longs location at around $6 million (I'm not counting other assets -- like the home office -- just stores). Which makes this a sweet deal for Longs.

While I do think that Longs would fit well under CVS's or Walgreen's wing, the timing and price of these offers puts me off a bit. I would have come in lower -- perhaps in the low-to-mid $60's -- and worked my way up, if needed.

On Friday, Longs closed at $71.66, down $0.07 or .10%.

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No positions in stocks mentioned.

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