Longs Sticking to CVS Merger Plan

Gimme Credit analyst Carol Levenson has been bracing for a possible bidding war from the start.

Levenson was a bit surprised when CVS suddenly announced plans to purchase Longs a month ago. After all, she noted at the time, CVS had just completed "a slew of scarcely digested acquisitions" when it decided to make the move.

"CVS has a strong track record of successfully buying, sprucing up and integrating other drugstore chains," Levenson said last month. However, "it always seems to be tempted by the next acquisition before recovering fully from the last one."

Most recently, CVS pursued a merger with Caremark in what was supposed to be an all-stock transaction. However, she noted, CVS had to sweeten that offer with $8.4 billion worth of cash in the end.

Now, CVS once again finds itself pursuing an unpopular deal even as a rival bidder keeps promising more.

"Although it wouldn't take much more in dollars for CVS to match the Walgreens bid (just over $100 million), we were already concerned about the cash it had agreed to spend, and the fact that it was embarking upon yet another acquisition without paying down debt from previous purchases," Levenson wrote this week. "CVS brandished its 'superior balance sheet' as an advantage during its negotiations with Longs. But Walgreens possesses even greater financial strength -- and we would hate to see CVS get into a prolonged bidding war with Walgreens on the other side of the battlefield."

Levenson views CVS's current bid for Longs as "reasonable" herself. With Walgreen now offering more, however, she doubts that Longs shareholders feel the same.