Walgreen Wades into Antitrust Waters

OKLAHOMA CITY -- If Walgreen (WAG) pulls off a purchase of Longs Drug Stores (LDG), the company will suddenly control two-thirds of the drugstores in one of the country's hottest markets.

While some doubt federal regulators would allow that kind of market power, Longs has achieved it on its own. Rankings by Chain Drug Review showed that Longs operated 69% of the drugstores located in booming Honolulu. Walgreen has approached that dominance in several other markets, but has made no wave.

Nonetheless, rival CVS(CVS) has been sounding alarms. When cautioning Longs against a deal with Walgreen, CVS specifically included Hawaii.

"If the FTC (Federal Trade Commission) concludes that a Walgreens/Longs transaction would have an anticompetitive effect in Hawaii," CVS stressed in a recent letter to Longs' board, "it would require divestiture of most -- if not all -- of the Longs Hawaiian stores."

Obviously, CVS hopes to win control of Longs' 521-drugstore chain for itself. CVS has an agreement to buy Longs for $71.50 a share, but the company faces resistance from Longs investors, who view the offer as too low, and then received a higher $75-a-share bid from Walgreen.

Walgreen hopes to secure hundreds of Long drugstores located in high-priced markets like California and Hawaii. If necessary, however, Walgreen will shed some of those drugstores as long as it doesn't have to sacrifice more than 40% of Longs' overall profit in the process.

Walgreen doubts that "anything even approaching (that) threshold" will be required.

Last week, the FTC requested detailed information about three different markets -- including Hawaii -- as it reviewed the competitive impact of Walgreens' proposed deal. While some saw this as a clear warning sign, the agency asked for data on mail-order traffic as well. Walgreens offers mail-order service, but it doesn't own one of the huge pharmacy-benefits managers that tend to dominate that business.