UPDATE 1-Investment group urges Longs to hold auction

(Adds dateline, details, background)

PHILADELPHIA, Sept 16 (Reuters) - Ctw Investment Group, which advises pension funds that own about 500,000 shares of Longs Drug Stores Corp LDG.N, urged the pharmacy chain to hold a formal auction and solicit takeover offers from interested parties.

Longs had agreed to be acquired by CVS Caremark Corp (CVS.N) in August for $71.50 per share, but on Friday it got an unsolicited takeover offer of $75 per share from Walgreen Co (WAG.N).

Longs said it would weigh Walgreen's offer but it still recommended that shareholders accept an earlier tender offer by CVS Caremark.

Longs had previously held talks with Walgreen, but negotiations faltered over price, according to filings with the U.S. Securities and Exchange Commission.

In a letter to Mary Metz, chairperson of Longs's governance and nominating committee, Ctw urged Longs to hire an independent investment advisor, solicit offers from all interested parties, and recommend the best offer to the board and shareholders.

"It now appears evident to us that the Longs board failed to pursue an appropriate process prior to approving the CVS proposal, and as a result entered into an agreement containing a variety of stringent 'lock-up' provisions despite not obtaining an offer from CVS that fully values Longs," Ctw said in the letter, which was publicly released.

"Walgreens' offer of $75 a share, while also accepting more antitrust risk than CVS, demonstrates that the process through which the Longs' board approved and recommended the CVS offer was badly flawed," Ctw said.

Walgreen said in its proposal that it could get cost synergies and expansion opportunities in fast-growing markets, including Hawaii.

"We infer that Walgreens wouldn't mind being forced to divest a good chunk of Longs California stores in order to get its hands on the Hawaii stores and the company's pharmacy benefits manager," said Carol Levenson, an analyst with gimmecredit.

Activist hedge fund Pershing Square Capital Management previously hired Blackstone Group to help it drive up the purchase price for Longs, according to media reports.

Pershing also had said in a letter to Longs shareholders that it believed the value of Longs's real estate exceeded the price offered by CVS.

Proxy advisory firm Risk Metrics Group also had recommended that Longs shareholders not tender their shares to CVS, citing concerns over Longs's failure to disclose more information concerning its real estate portfolio.

Longs and CVS could not be immediately reached for comment. Walgreen said it has given a proposal to Longs and is awaiting a response. (Reporting by Jessica Hall, editing by Gerald E. McCormick) (For more M&A news and our DealZone blog, go to here)