SAN FRANCISCO (Reuters) - CVS Caremark Corp (CVS.N) said on Tuesday it would buy its U.S. West Coast rival Longs Drugs Stores Corp LDG.N in a $2.54 billion deal that will allow it to expand in states like California and broaden the reach of its prescription services.
Shares in CVS fell nearly 7 percent on the news.
The acquisition of Longs’ 521 stores will add to CVS’s presence in California and will give it a leading position in Hawaii, where it doesn’t operate. Longs’ stores are also located in Nevada and Arizona.
CVS will pay $71.50 per share for Longs, including its Rx America subsidiary, a prescription benefits management services company with over 8 million members. Longs shares closed at $54.04 before the news on Tuesday, but surged nearly 30 percent in extended trading on the deal.
CVS said it would finance the deal, which also includes up to $360 million in debt, with a $1.5 billion bridge loan facility, together with existing cash. The deal is expected to be completed in the fiscal fourth quarter of 2008.
The deal is expected to crimp earnings per share at CVS in its first year, but add to earnings beginning in 2010, the companies said.
CVS is expected to gain cost savings of approximately $100 million in 2009 and approximately $140 million to $150 million in 2010 from purchasing savings and lower selling, general and administrative costs.
“This transaction provides tremendous benefits to CVS by accelerating our expansion in very attractive drugstore markets and strengthening our geographic reach,” CVS Chairman and Chief Executive Thomas Ryan, said in a statement.
Woonsocket, Rhode Island-based CVS Caremark, one of the largest U.S. drugstore chains, said it would have taken at least ten years or more to develop Longs’ store base organically.
The company was formed when drugstore operator CVS acquired pharmacy benefits manager Caremark for $24 billion in March 2007.
CVS and its main competitor, Walgreen Co WAG.N, have been expanding beyond the traditional drugstore business in recent years in order to reap more of the money spent on other areas of health care by an aging U.S. population.
That foray into a wider array of health-care operations has helped mitigate slowing growth of drugstores sales as the U.S. economy weakens.
CVS said that Longs’ substantial presence in Southern California will provide a foundation for “significant” future growth in that state. Longs is based in Walnut Creek, California.
The deal also brings CVS real estate valued at more than $1 billion for some 200 Longs’ store locations.
Shares of CVS fell 6.7 percent in extended trade to $35.50 after closing at $38.05 on the New York Stock Exchange, while shares of Longs rose 29.5 percent after-hours to $70.