September 5, 2008
Can Longs Make a Better Deal?
A number of large investors with shares in Longs Drug Stores think the chain’s management made a bad deal to merge with CVS Caremark. The argument against the $71 a share bid is that is doesn’t fairly value Longs’ real estate assets.
CtW Investment Group, a firm that advises union pension funds, is among the groups that believe Longs real estate is valued too low and needs to be revised upward, according to a Reuters report.
In a letter and email sent earlier in the week, CtW said, “We believe there are reasonable grounds to suspect that the current tender offer from CVS, which the Longs board has endorsed, undervalues the company’s real estate assets.”
Longs’ largest investor, the Advisory Research hedge fund, has called on it to make the details of its real estate holdings available to shareholders.
David Heller, chairman of Advisory Research, recently said it is in Longs’ best interest “to let shareholders know what they own. We can only make an enlightened decision if we can know the facts.”
According to a Deal Journal blog on The Wall Street Journal website, Longs owns about 20 percent of its real estate and has enviable lease arrangements on most of its other properties.
If the offer made by CVS turned out to be too low, some are hoping that a bidding war could heat up between it and others such as Walgreens or Walmart.
The Deal Journal piece downplayed the prospect of another suitor getting into the mix. J.P. Morgan Chase, which has served as Longs’ advisor, is prevented from shopping the company around to potential buyers nor is it allowed to discuss offers from interested parties. The deal breakup fee for CVS is $115 million.
Discussion Questions: Do you think that Longs has undervalued its real estate and that the deal between it and CVS may falter as a result? Is there a better takeover match for Longs than CVS?
BrainTrust
Recent Discussions
Discussion Questions
Poll
Without direct knowledge of Longs’ real estate portfolio, it’s difficult to comment on this one. However, the institutions that are questioning the deal should be careful about how vigorously they pursue this. The real estate market is not at its peak right now. An intensive look might also reveal that the leases and land are not worth the hoped-for premium. Regardless, Longs has other assets too–managed care contracts, a portfolio of prescription patients, geographic coverage–that are also components of value. Reducing a retail organization solely to its real estate holdings is too simplistic a way to judge value, in my opinion.
I agree, the only buyer is CVS. Walgreens would have antitrust issues and Walmart isn’t in the freestanding drugstore business.
There may be some truth to the contention that the real estate isn’t being valued properly, but that can be vetted. However, the real estate valuation at this time won’t really recognize the actual value, due to the market. Bad timing. Trying to bring another bidder in isn’t the way to go.
In an economic climate where we are significantly overbuilt with retail establishments, and the vacant stores continues to increase, I think it might be a bit bold for these investors to think that Longs’ real estate holdings are being undervalued. CVS has made a fair offer for the shares, and this will allow Longs to exit gracefully while the going is good. Add this to the fact that there are not a lot of potential acquirers lining up to purchase the chain, I think it might be wise for the shareholders to take their profits, and allow the deal to progress. Otherwise, CVS might just walk away and open their own stores in the Longs market, and really cause the value of the stock to shrink.
It’s difficult to imagine that Walmart would enter into a “bidding war” to acquire Longs. The folks who are predicting such an event have probably not spent too much time hanging out in Bentonville. I don’t believe that there are enough remaining retail players in the field, other than CVS, that could acquire Longs and have it make a lot of sense.
When I said previously that “Walmart isn’t in the freestanding drugstore business,” I wasn’t thinking about their new concept, Marketside.
Purchasing Longs would give them a lot of real estate for that concept in California and Nevada, their likely initial markets (based on that their prototypes are in the Phoenix area). However, again the timing is off. While they might be able to acquire the real estate at a depressed price and further reduce the cost by selling off the RxAmerica unit and the Hawaiian stores (as it’s doubtful that there’s a priority for that market), the concept is still in the prototype stage and it would be a gamble to acquire a large number of sites at this point in time, even if they can get them for a good price.
Whenever a publicly-held business is sold, some of the shareholders claim the price is too low. Sometimes it’s just posturing to get a higher bid on the original deal. Sometimes the shareholders really want an auction. Sometimes the shareholders just want to keep their ownership intact.
A higher bid for Longs? At least 2 obstacles: the breakup fee and the sorry state of investing these days. To comment on the latter: way fewer investors love retailers these days so there’s way less acquisition money around. Harder to get bank loans for acquisitions, too. And who’s in love with the real estate business these days?
More Discussions
As Boomers ‘Age Out of Peak Purchasing,’ How Can National Brands Retain Interest With Gen Z?
According to a recent First Insight study titled “Is Gen Z Still Choosing Your Brand,” while…Is Supply Chain Volatility Here To Stay?
Can we expect an ongoing volatility to remain in terms of retail supply chain?Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?
Without direct knowledge of Longs’ real estate portfolio, it’s difficult to comment on this one. However, the institutions that are questioning the deal should be careful about how vigorously they pursue this. The real estate market is not at its peak right now. An intensive look might also reveal that the leases and land are not worth the hoped-for premium. Regardless, Longs has other assets too–managed care contracts, a portfolio of prescription patients, geographic coverage–that are also components of value. Reducing a retail organization solely to its real estate holdings is too simplistic a way to judge value, in my opinion.
I agree, the only buyer is CVS. Walgreens would have antitrust issues and Walmart isn’t in the freestanding drugstore business.
There may be some truth to the contention that the real estate isn’t being valued properly, but that can be vetted. However, the real estate valuation at this time won’t really recognize the actual value, due to the market. Bad timing. Trying to bring another bidder in isn’t the way to go.
In an economic climate where we are significantly overbuilt with retail establishments, and the vacant stores continues to increase, I think it might be a bit bold for these investors to think that Longs’ real estate holdings are being undervalued. CVS has made a fair offer for the shares, and this will allow Longs to exit gracefully while the going is good. Add this to the fact that there are not a lot of potential acquirers lining up to purchase the chain, I think it might be wise for the shareholders to take their profits, and allow the deal to progress. Otherwise, CVS might just walk away and open their own stores in the Longs market, and really cause the value of the stock to shrink.
It’s difficult to imagine that Walmart would enter into a “bidding war” to acquire Longs. The folks who are predicting such an event have probably not spent too much time hanging out in Bentonville. I don’t believe that there are enough remaining retail players in the field, other than CVS, that could acquire Longs and have it make a lot of sense.
When I said previously that “Walmart isn’t in the freestanding drugstore business,” I wasn’t thinking about their new concept, Marketside.
Purchasing Longs would give them a lot of real estate for that concept in California and Nevada, their likely initial markets (based on that their prototypes are in the Phoenix area). However, again the timing is off. While they might be able to acquire the real estate at a depressed price and further reduce the cost by selling off the RxAmerica unit and the Hawaiian stores (as it’s doubtful that there’s a priority for that market), the concept is still in the prototype stage and it would be a gamble to acquire a large number of sites at this point in time, even if they can get them for a good price.
Whenever a publicly-held business is sold, some of the shareholders claim the price is too low. Sometimes it’s just posturing to get a higher bid on the original deal. Sometimes the shareholders really want an auction. Sometimes the shareholders just want to keep their ownership intact.
A higher bid for Longs? At least 2 obstacles: the breakup fee and the sorry state of investing these days. To comment on the latter: way fewer investors love retailers these days so there’s way less acquisition money around. Harder to get bank loans for acquisitions, too. And who’s in love with the real estate business these days?