CVS to buy Longs Drugs

September 15, 2008

CVS Caremark acquires Longs Drugs, a California-based chain of 521 stores, for $2.9 billion.

Key Points

Say goodbye to Longs Drugs. CVS Caremark is buying the California-based 521-store regional chain for $2.9 billion. The acquisition gives the Woonsocket, R.I.-based CVS about 6,800 stores in 41 states and nearly a third of the total U.S. prescription volume.

"This transaction provides tremendous benefits to CVS Caremark by accelerating our expansion in very attractive markets and strengthening our geographic reach," CVS chief executive Tom Ryan said in announcing the acquisition.

CVS sales hit $85 billion last year. Longs reported $5 billion in revenue last year from stores in California, Hawaii, Nevada, and Arizona. The company also owns pharmacy benefits manager RxAmerica. "It was necessary to merge with a national player because increasingly we compete with national players," Longs CEO Warren Bryant said.

Longs is CVS's 10th acquisition in the past decade and the second major purchase in California. The New England chain powered into California in 2006 by buying 700 Osco/Sav-On stores, then the dominant pharmacy brand in Southern California. Longs is the dominant brand in Northern California. CVS also acquired 1,260 Eckerd stores in 2004 and PBM Caremark in 2007.

CVS has been so successful with its growth-by-acquisition strategy that analysts largely yawned at the Longs purchase. Moody's Investor Service and Standard and Poor's Ratings Service both affirmed CVS credit ratings. "The affirmation reflects the fact that Longs will provide CVS with a meaningful presence in California, in which CVS is currently underpenetrated, and CVS' history of successfully integrating acquisitions," Moody's analyst Margaret Taylor wrote.

Independent pharmacies aren't likely to feel much pressure because CVS is taking over existing chain locations. AmerisourceBergen said the acquisition will have little impact on drug wholesalers. ABC spokesman Michael Kilpatric noted that CVS will acquire Longs' AmerisourceBergen distribution contract along with other assets. He said the acquisition does not signal a round of industry consolidation. CVS is clearly buying into a major market, not trying to roll up smaller competitors.

Analysts said Walgreens faces the biggest challenge. It is now confronting another national chain with similar buying power and resources in fast-growing markets around California and Arizona. CVS and Longs said the deal should close late this year.