CVS Caremark CVS and regional drugstore chain Longs Drug Stores LDG jointly announced Aug. 12 a proposed acquisition of Longs by CVS Caremark for $2.9 billion, which includes the assumption of net debt. This deal price works out to $71.50 per share, and it represents a 32% premium to Longs' closing price Aug. 11 and a 38% premium to our fair value estimate. CVS Caremark will be launching a tender offer for all of Longs' outstanding shares and will require two thirds of the shares to be tendered to complete the transaction. Because this is a friendly deal and CVS Caremark is paying a considerable premium for a stock sitting not too far off a 52-week high, we expect the tender offer to be successful and are raising our fair value estimate to the agreed-upon price.

For CVS Caremark, the acquisition of Longs is complementary and gives it strong market share positions in many regions where it has little penetration. These regions will also be important in terms of the firm's ability to serve some of its pharmacy benefits management clients through new offerings that leverage its retail footprint. At 10.5 times earnings before interest, taxes, depreciation, and amortization, we feel CVS Caremark is paying a rich price, though the firm believes it will be able to extract about one third of the transaction price through sale/leasebacks of some of the owned properties. CVS Caremark expects that adding Longs will be dilutive to its earnings in 2008 and 2009, but the dilution is mild and Longs will constitute only about 6% of total sales once combined with CVS Caremark. We are leaving our fair value estimate for CVS Caremark's shares in place at this time.

 Full Analyst Report

 Full Analyst Report