Large Longs Drug (LDG) Holder Advisory Research Questions Merger with CVS (CVS)

August 20, 2008 1:24 PM EDT

In a 13D filing on Longs Drug Stores (NYSE: LDG), Advisory Research disclosed a 9.2% stake (3,304,287 shares) in the company and raised questions about the pending merger with CVS Caremark (NYSE: CVS). The firm is asking for additional information regarding the assets of the Company, specifically with respect to the valuation of the real estate owned and leased by the Company.

NOTE: It has also been reported that another large Longs Drug holder, Bill Ackman of Pershing Square Capital, has raised similar questions.

From the Filing:

"The Reporting Persons originally acquired the Common Stock for investment purposes in the ordinary course of business.

The Reporting Persons reviewed the proposed tender offer by Blue MergerSub Corp., an indirect wholly owned subsidiary of CVS Caremark Corporation ("CVS Caremark"), to purchase all outstanding shares of Common Stock of the Company (the "Offer").

To evaluate the Offering, the Reporting Persons asked the Company for additional information regarding the assets of the Company, specifically with respect to the valuation of the real estate owned and leased by the Company.

As set forth in the third paragraph of the Joint Press Release issued by the Company and CVS Caremark, dated August 12, 2008:

"Significantly, Longs owns the real estate associated with approximately 200 store locations, three distribution centers and three office facilities. CVS Caremark has conservatively valued the store locations alone at more than $1 billion. These stores are located in markets where commercial real estate values are among the highest in the country and prime locations are especially difficult to acquire. CVS Caremark intends to unlock the intrinsic value of these locations, as well as the distribution centers and office facilities, by monetizing a substantial portion of these assets over time."

As stated in the Schedule 14D9 filed by the Company on August 18, 2008, in the sixth bullet point contained under "Reasons for the Recommendation," the Company, in evaluating the Offer, considered that:

"The Board's belief that the Company would not be able to readily liquidate or monetize its real estate in a manner that would be certain to yield value to the Company and its shareholders in excess of the Offer consideration and that there were significant tax implications to doing so."

In light of these potentially conflicting assertions, and the absence of any substantive disclosure or analysis regarding the value of the Company's owned and leased real estate, the Reporting Persons believe that additional information is needed with respect to the valuation of such real estate of the Company.

Prior to making any decision to tender in the Offer shares of Common Stock held under investment management by the Reporting Persons, the Reporting Persons believe that they should perform additional due diligence regarding the Company and the Offer to determine whether the Offer is in the best interests of its clients.

The Reporting Persons intend to review their clients' investments in the Company as set forth above, on a continuing basis and may engage in discussions with management of the Company, the board of directors of the Company, other shareholders of the Company and other relevant parties concerning the Offer and the business, operations, management, governance, strategy and future plans of the Company. Depending on various factors including, without limitation, the Company's financial position and strategic direction, whether the Reporting Persons are able to obtain the valuation of the real estate owned and leased by the Company, the outcome of the discussions and actions referenced above, actions taken by the board of directors of the Company, price levels of the Common Stock, other investment opportunities available to the Reporting Persons, conditions in the securities market and general economic and industry conditions, the Reporting Persons may in the future take such actions with respect to their clients' investments in the Company as they deem appropriate including, without limitation, purchasing additional shares of Common Stock or selling some or all of their clients' shares of Common Stock, engaging in short selling of or any hedging or similar transactions with respect to the Common Stock, soliciting outside parties that may have an interest in acquiring the Company for fair consideration and/or otherwise changing their intention with respect to any and all matters referred to in Item 4 of Schedule 13D. Except as set forth herein or as would occur upon completion of any of the actions discussed herein, the Reporting Persons have no present plan or proposal that would relate to or result in any of the matters set forth in subparagraphs (a)-(j) of Item 4 of Schedule 13D."

Related Categories

13Ds
Mergers and Acquisitions

Stocks Mentioned

Related Entities

• William Ackman
• UBS
• Pershing Square Capital
• Citi
• Advisory Research

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