CtW Investment Group Challenges Longs' Anti-Trust Arguments (NYSE: LDG)
29 Setembro 2008 - 1:31PM
PR Newswire (US)
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. Conclusion 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. Sincerely, Richard W. Clayton III Research
Director DATASOURCE: CtW Investment Group CONTACT: Richard Clayton
of CtW Investment Group, +1-202-255-6433 Web Site:
http://www.ctwinvestmentgroup.com/
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