WOONSOCKET, R.I. CVS Caremark has taken exception with an antitrust memo recently submitted to the board of Longs Drug Stores arguing that it contains numerous “inaccuracies and analytic deficiencies.”
“We are aware that the board of directors of Longs recently received a memorandum from a law firm retained by the CtW Investment Group, which purports to offer an “independent”antitrust analysis of the regulatory timing and substantive risk posed by a potential acquisition of Longs by Walgreens,” CVS stated. “While not attempting an exhaustive rebuttal, we feel it is important to point out the basic factual inaccuracies and analytic deficiencies contained in this highly misleading memorandum, which attempts to equate the regulatory risks of a CVS/Longs combination and a Walgreens/Longs combination.” CtW Investment Group works with pension funds sponsored by unions affiliated with Change to Win, a federation of unions representing more than six million members. Many of these funds are long-term Longs shareholders.
As previously reported by Drug Store News, CtW Investment Group in late September sent a letter to Longs challenging its anti-trust arguments associated with Walgreens’ unsolicited bid and urging it, once again, to hold an auction for the company.
The letter also states that CtW hired anti-trust counsel from the firm Doyle, Barlow and Mazard LLC, who have concluded, according to CtW, “a Walgreens/Longs merger should not give rise to significant anti-trust concerns, nor require significant divestitures.”
“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,” stated CtW in the letter sent to Dr. Mary Metz, chairperson of the Governance and Nominating Committee for Longs.
“However, the board has not provided shareholders with any evidence to support these assertions, let alone that any other potential transaction that might arise to the top in an auction process would also face such regulatory risk.” CtW urged Longs’ board in the letter to disclose its own expert analysis or acknowledge that offers potentially superior to CVS’ are available and to undertake the auction process CtW recommended in a separate letter dated Sept. 16.
In response, CVS issued the statement Friday explaining that it takes exception with several arguments made in the memo submitted to the Longs’ board by the law firm retained by CtW.
Some of the inaccuracies in the arguments made in the memo, according to CVS, include:
• “Erroneous calculation of store overlaps. The memorandum claims that ‘in CVS/Longs, the FTC chose not to engage in a long investigation even though almost 2/3 of all Longs stores overlapped with CVS stores...’ While the memorandum did not disclose specifically how it defined an ‘overlap,’ this assertion is plainly inaccurate, since there are 13 Metropolitan Statistical Areas (MSAs) across which Longs operates approximately 200 stores and across which CVS has none. Furthermore, in the San Francisco MSA, Longs has 22 stores while CVS has no retail pharmacies and only one specialty pharmacy and in Oakland, Longs has 62 stores while CVS has no retail pharmacies and only two specialty pharmacies. Thus, approximately 284 of Longs’ 521 pharmacies, or over 54 percent, are located in MSAs where CVS has zero retail pharmacies.”
• “False statements regarding CVS intention to enter Hawaii market. The memorandum claims that ‘CVS had plans to enter the Hawaii market,’ which ‘seemed to be of little concern to the FTC.’ This claim is patently false, as CVS has never had plans to enter Hawaii. Therefore, the FTC's handling of CVS/Longs provides no insight into how it would handle the combination of Walgreens and Longs, for which Hawaii would be a problem. As has been publicly disclosed, the ‘Hawaii problem’ is already an area of inquiry in the document request that Longs received from the FTC.”
• “Disregard of market share issues resulting from a Walgreens/Longs combination. The memorandum focuses primarily upon the FTC’s review of the Rite Aid/Eckerd transaction, and its focus on local markets for the retail sale of pharmacy services to cash customers in that transaction. In so doing, the memorandum ignores the huge MSA-level market dominance that would result from combining Walgreens and Longs in MSAs throughout California, Nevada, and Hawaii, and fails to analyze other relevant markets in which such dominance would be both relevant and problematic.”
• “Analytically incomplete. The analysis offered by the memorandum is significantly deficient because it fails entirely to assess the sale of pharmacy services to third party payors, which is the market analyzed in previous FTC actions such as CVS/Revco (1997), J.C. Penney/Thrift Drug (1996/97), and Rite Aid/Revco (1996). As we know from the FTC's inquiries regarding the CVS tender offer and the document request Longs has received in connection with the Walgreens expression of interest, this market remains a highly relevant focus of inquiry and concern. The memorandum’s claim that ‘market share data at the level of metropolitan areas should not play a meaningful role in the FTC’s analysis’ of a Walgreens/Longs transaction is simply wrong.”
“In summary, any suggestion that the regulatory risks involved in a CVS/Longs transaction and those involved in a Walgreens/Longs transaction are comparable is nonsense,” CVS stated. “The CVS regulatory review is over, and no action was required by either the FTC or the State Attorney General involved. In contrast, the FTC has just commenced a broad and searching review of the difficult antitrust issues raised by a potential Walgreens/Longs transaction. The Walgreens proposal entails meaningful regulatory risk, and regulatory delay is now certain. The two situations are completely different.” CVS announced in mid-August that it plans to buy for $2.9 billion, including debt, Longs’ 521 retail locations in California, Hawaii, Nevada and Arizona, as well as its PBM services. On Sept. 5, the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act expired, satisfying a condition to the closing of CVS’ offer.
Looking to quash the deal that Longs management had already approved with CVS, Walgreens came forward at the 11th hour with an unsolicited, non-binding bid to buy Longs for nearly $3 billion in cash and debt assumption.
While Walgreens’ offer, which is subject to regulatory approvals and the completion of due diligence, represents a $3.50 per share premium over the cash purchase price to be paid to Longs shareholders under the proposed acquisition by CVS, the bid from Walgreens immediately raised the eyebrows of several industry analysts given the likely regulatory hurdles and the potential for substantial store divestitures.
Longs has rebuffed—twice—Walgreens’ unsolicited bid to acquire the chain but Walgreens maintains that it will continue to move forward and has stated that it is prepared to go directly to Longs’ stockholders.