At first glance it’s tough to believe there is any merit to the argument that CVS’s $71.50 per share all-cash offer to purchase Longs Drug Stores Corporation (Ticker: LDG) last week represents less than full value. Especially considering the fact that the offer represents a 32% premium over the previous close and a 22.5% premium for ANY shareholder that bought the stock within the past five years (LDG 5-Year high was $58.37 on May 22, 2007).
Activist Investors Believe Long’s is worth More
On August 5th
Following the announced transaction, Pershing Square – who is well known for their activist investing in retail companies holding valuable real estate assets (i.e. Sears, Target, Borders, etc…), hired Blackstone Group to examine whether there is more value in LDG remaining independent (and monetizing their real estate assets themselves) or being sold to a competitor like Walgreen’s.
Separately, institutional investor Advisory Research, Inc. (who owns 9.7% at an average cost of $38.50), changed their filing status with the SEC this week from “13G - passive” to “13D - active” and disclosed they will need more information about the value of the company’s real estate assets before they will vote in favor of the transaction.
CVS and Long's Need their Votes
Once again, (as all things related to activist investing tend to do) it all comes down to the shareholder votes. And since at least 2/3rds of the outstanding shares must be tendered for the transaction to be successful, one of a few things are likely to happen (1) CVS and LDG successfully convince shareholders the deal is adequately valued (which seems unlikely since the stock has consistently traded above the offer price since the announcement), (2) CVS increases the offer with a price that satisfies the activists, (3) the deal gets blocked and Pershing Square steps in to help monetize the assets, or (4) an unsolicited competitive offer drives up the price.
However, this last option is fraught with problems. Under the terms of the agreement LDS is unable to competitively shop the deal and must pay CVS up to $125 million if the merger is terminated.
Under the terms of the tender offer, shareholders have until September 15th to tender their shares.