NEW YORK - Wall Street was surprised when CVS Caremark Corp. offered $2.7 billion to buy Longs Drugs Stores Corp., but some Longs shareholders are saying they'll oppose the deal if Longs doesn't tell them more about the value of its real estate.
On Aug. 12, CVS Caremark agreed to pay $71.50 per share for Longs, gaining more than 500 stores and expanding its presence on the West Coast. CVS valued Longs' real estate at about $1 billion, citing the difficult real estate market in California, where most of Longs stores are located. But CtW Investment Group said that price is too low, by as much as $260 million, and two major Longs shareholders say they want to know more about how the real estate and leases were valued.
At an investor conference Thursday, CVS Chief Executive Tom Ryan said he believes the deal will get the necessary two-thirds shareholder approval. CVS' tender offer expires Sept. 15, although Ryan noted it can be extended for up to a year. He also said the Longs stores are more valuable to CVS than most other retailers, and not many banks and retailers are looking for sites that size.
In a letter dated Monday to Mary Metz, the chairwoman of Longs' governance and nominating committee, Richard Clayton of CtW Investment Group says the buyout price should have been between $76.62 to $78.81 per share, which would put the final price near $3 billion, on the high end.
CVS' offer was a 32.3 percent premium from Longs' closing price on Aug. 12.
CtW works with pension funds sponsored by unions connected to the Change to Win federation of unions. Those funds, along with public employee funds, hold more than half a million Longs shares, or roughly a 1.4 percent stake.
Clayton writes that Longs should disclose the value of its real estate portfolio, saying Longs investors need more information about the deal before deciding how to vote. He said two investment firms, Pershing Square Capital and Advisory Research, agree that Longs' portfolio is being undervalued.
David Heller of Advisory Research said the bidding for Longs hasn't been transparent, and he believes the company needs to disclose the value of its real estate and the leases on its properties, which could add more value.
CVS and Longs did not return calls seeking comment.
Heller said his firm has been asking Longs for the real estate information for several years but has been turned down because Longs did not want its competitors to have that information. But since CVS has seen a summary of the information, he believes investors should see it, too.
The Louisiana Municipal Police Employees' Retirement System and representatives of the Steamfitters Local 449 Pension Fund have filed lawsuits against Longs to get that information.
Advisory Research and Pershing Square own about 18 percent of the outstanding stock, or about 6.5 million shares combined. Heller said he does not think the deal will go through if Longs does not release the information. Longs stock is currently trading slightly higher than the buyout price, and Heller cited those trades as evidence that shareholders are looking for more.
In a telephone interview, Jefferies analyst Scott Mushkin said Longs would not be able to get much cash from its real estate holdings. Most of its properties are large spaces in strip malls, he said, and there are many similar properties in California.
"This size property in California is a disaster right now, according to real estate contacts we have," he said. Mushkin added that some investors may be overestimating the value of Longs real estate and are potentially overlooking tax obligations that would prevent it from getting the same kind of value that CVS can get.
In a client note published in August, Edward Kelly of Credit Suisse said Longs' stores are too big, and 90 percent of them are located in undesirable strip mall centers. Kelly and other analysts thought CVS' bid was high.
"Commercial real estate is only worth the cash it can generate over its lifespan," Mushkin said. Because demand is so weak, CVS will have trouble selling the properties, and the value is "all theoretical."
On Thursday, shares of CVS shed 96 cents, or 2.6 percent, to $36.49. Longs shares climbed 10 cents to $71.75.