WASHINGTON, Sept. 29 /PRNewswire/ -- In a letter to Dr. Mary S. Metz, the chairwoman of the Longs (NYSE: LDG) board's Governance Committee, the CtW Investment Group questions the Longs' board's refusal to enter into negotiations with Walgreens and challenges the arguments put forward by the board regarding anti-trust risks associated with Walgreens' proposed purchase of Longs. Citing analysis prepared by expert anti-trust counsel Doyle, Barlow, and Mazard (DBM), and in stark contrast to Longs' assertion that a Walgreens merger would entail significant anti-trust-related regulatory delays, CtW argues that the proposed Walgreens merger could be approved even without a second request for information. Moreover, CtW Investment Group contends that even if regulators require a longer review period, the cost to shareholders will be much smaller than Longs has projected.
The letter to Dr. Mary S. Metz and the anti-trust analysis prepared by Doyle, Barlow, and Mazard are available at http://www.ctwinvestmentgroup.com.
** Note: For additional information or comment please contact Richard Clayton at 202-255-6433. Full text of the letter to Longs Board's Governance Committee chairwoman Dr. Mary S. Metz is below.**
September 29, 2008
Dr. Mary S. Metz
Chairperson, Governance and Nominating Committee
Longs Drug Stores Corporation
141 North Civic Drive
Walnut Creek, California 94596
Dear Dr. Metz,
We are perplexed by the Longs board's repeated refusal to recognize that there are potential acquirers, including but not limited to Walgreens, willing to offer shareholders a higher price than $71.50 per share. The board has explained its actions by pointing to the anti-trust risks entailed by a Walgreens/Longs merger, both the direct risks of the FTC blocking such a transaction, or requiring substantial divestitures, and the indirect risk of a lengthy regulatory review process that delays the deal's closing by as much as a year.
However, the board has not provided shareholders with any evidence to support these assertions, let alone that any other potential transaction that might rise to the top in an auction process would also face such regulatory risk. We have retained expert anti-trust counsel from the firm Doyle, Barlow, and Mazard LLC who have concluded, in the attached report, that a Walgreens/Longs merger should not give rise to significant anti-trust concerns, nor require significant divestitures. In light of these findings, which we summarize below and attach for your reference, we urge the Longs board either to disclose its own expert analysis, or acknowledge that offers potentially superior to CVS's are available and undertake the auction process we recommended in our letter to you dated September 16th.
The CtW Investment Group works with pension funds sponsored by unions affiliated with Change to Win, a federation of unions representing more than 6 million members, to enhance long-term shareholder value through active ownership. Many of these funds are substantial long-term Longs shareholders.
Understanding Regulatory Risk in the Walgreens Proposal
As the attached report from Doyle, Barlow, and Mazard (DBM) describes in detail, the methods used by the FTC to evaluate the competitive implications of the proposed Walgreens/Longs merger should lead to the conclusion that there is little cause for regulatory concern. In their report, DBM considered the methods used by the FTC in reviewing Rite Aid's 2007 acquisition of Brooks/Eckerd stores, and the proposed CVS/Longs merger. Based on these precedents, they then examined all overlaps between Longs and Walgreens that in their judgment present similar issues to overlaps in the CVS/Longs proposed merger. They argue that in each case, a combined Walgreens/Longs would face competition at least as constraining as a combined CVS/Longs would face. They note that in one instance - Nipoma, California - CVS/Longs would own two of four pharmacies, but that the FTC required no divestiture because alternatives were within between 5 and 8 miles. Using the non-problematic Nipoma precedent, DBM lists every overlap between Walgreens and Longs. They find that 88% of such overlap stores occur in markets where the combined company would have less than 50% of the market. For those overlaps that constitute 50% or more of the market, they list alternative stores within no more than a 5 to 8 mile range; in some cases alternatives are even closer. Given the availability of numerous alternatives, they conclude that there is no cause to believe that this proposed transaction would entail either a lengthy review process or significant divestitures.
We attach this report for your review, as we believe that the Longs board will benefit from thorough, independent, and objective analysis of potential anti-trust risk related to the proposed Walgreens merger.
Longs Response to Walgreens Wanting
In its September 17 response to Walgreens, Longs argued that the offer from Walgreens was not even potentially superior to the CVS offer, despite offering $3.50 more per share. Longs argued that given Walgreens' large share of the Northern California pharmacy market, a proposed merger would entail both the direct risk of either a blocking action by the FTC or divestitures above the threshold of 40% of Longs' Consolidated Operating Income identified by Walgreens, and the indirect risk of a 9-12 month review process that would reduce the value of the Walgreens' offer below that of CVS's.
However, Longs has not supported its key factual assertion - that the Walgreens proposal would entail significant anti-trust risk - except by pointing to Walgreens' market share in parts of California. For instance, Longs asserted that "approximately 63% of Longs' mainland counters are within 2 miles of a Walgreens' location," that "the combined entity would operate over twice as many pharmacy counters in Northern California ... than the nearest remaining competitor," and finally that "In both Northern California and a number of significant metropolitan markets ... it would have market shares well above 40%." As the analysis by Doyle, Barlow, and Mazard explains, market share data at the level of metropolitan areas should not play a meaningful role in the FTC's analysis of this transaction. Moreover, the fact that there are overlaps (within 2 miles) between Longs and Walgreens stores does not in any way indicate that such overlaps would be of concern without additional analysis indicating that there are few or no alternatives for consumers within those areas. Finally, the assumption that a 2 mile radius is an appropriate parameter for these areas must be explicitly supported: for urban areas - where the bulk of Longs overlaps with Walgreens occur - a larger radius may be more appropriate.
We further observe that in the proposed CVS/Longs merger, which has already cleared the federal anti-trust process, CVS and Longs together account for approximately 40% market share in a number of metropolitan statistical areas, including San Diego, Los Angeles, Santa Barbara, Las Vegas, and Reno. Despite the fact that the stores in these areas comprise nearly 29% of Longs locations, the CVS transaction was approved with no required divestitures and without even a second request for information from the FTC. Given these facts, Longs shareholders have no reason to take the board's assertions at face value without further explanation; the board must support its contentions by disclosing to shareholders the anti-trust analysis provided by its advisors, so that shareholders can judge for themselves if this analysis is credible.
Even assuming, arguendo, that the proposed Walgreens merger would generate a second request for information, both the length of the likely review process and the cost of such a delay to Longs shareholders appear to be significantly exaggerated. In the most recent major retail pharmacy merger - Rite Aid's acquisition of Brooks and Eckerd stores from the Jean Coutu Group - the anti-trust review process took approximately 6 1/2 months from the date of filing for HSR review (September 21, 2006) to the announcement of an agreement with the FTC (April 12, 2007). We have estimated the impact of regulatory review related delays to the value of the Walgreens proposal, using an estimate of Longs' current Weighted Average Cost of Capital (6.25%). We note that since CVS only received tenders of approximately 4.5% of shares as of September 12, and has extended its offer through October 15, CVS's offer must also be discounted by at least one month to reflect this delay (from the point of view of a Longs shareholder on the day Walgreens announced its offer). Table 1 summarizes the results of this analysis:
Table 1: Impact of Delay on Longs Shareholders Value at 6.25%
CVS, one month delay $70.76
Walgreens 7 month delay $72.32
Walgreens 9 month delay $71.57
Walgreens 12 month delay $70.47
Assuming a 7 month review process, comparable to the Rite Aid/ Jean Coutu merger, the current Walgreens offer exceeds the value of the CVS offer by more than $1.50 per share. At 9 months, the Walgreens offer would exceed the value of the CVS offer by $0.81 per share. Only at the extreme end of the range projected by the Longs board for anti-trust review, a review period nearly twice that for the Rite Aid/ Jean Coutu merger, would the CVS offer exceed the value of the Walgreens proposal. Given that the Rite Aid/ Jean Coutu transaction involved over 1800 stores in 14 states and that the proposed acquisition of Longs involves less than one-third that number, we see no reason to assume that a Walgreens merger would require a substantially longer review period. Moreover, given the apparently low level of support from Longs shareholders for the CVS offer, it seems inappropriate for the Longs board to assume no further delays to the closing of that proposed transaction, especially as one has already occurred. If CVS is unable to obtain the requisite tenders by October 15, then the value of its proposal relative to the Walgreens offer will fall further, making the intransigent position of the Longs board all the more inexcusable.
The arguments presented by the Longs board in declining to enter into negotiations with Walgreens, to say nothing of engaging in a full-fledged auction as we have called for, are clearly wanting. If, even after reviewing the report prepared by our anti-trust counsel and the concerns we raise above, the Longs board remains convinced that the Walgreens offer is not even potentially superior to the CVS proposal, and remains further convinced that no other, potentially superior proposals are available, we believe it is incumbent upon the board to disclose the findings and analysis of its advisors with respect to anti-trust risk related to the Walgreens offer, in at least as much detail as the report we have provided. Without such a detailed explanation of the board's position, Longs shareholders will have difficulty believing that the board is genuinely seeking to ensure that shareholders will receive the greatest possible value for their investment.
Richard W. Clayton III
|SOURCE CtW Investment Group|
Copyright©2008 PR Newswire.
All rights reserved