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no longer interested in a deal -- and financing scare for other possible bidders --

Longs Drug Stores


may regret playing hard to get.

As the stock market plunged this week to its lowest level in years, Walgreen decided to keep its $3 billion and let Longs sell itself to


(CVS) - Get CVS Health Corporation Report

instead. Walgreen had topped CVS's $75-a-share bid by offering $75 a share for the regional drugstore chain.

"With the stock market revaluation we're witnessing even as we write this, we doubt this will be the last takeover bid launched in headier days that is withdrawn," Gimme Credit analyst Carol Levenson said in a research note Thursday. "CVS might also want to reconsider the premium it is paying for Longs and the value of its real estate, but it's probably gone too far to turn back now."

Just weeks ago, Longs shareholders were looking for a bidding war. Now, their options are limited. Either they accept CVS's $71.50 offer -- which they previously rejected as too low -- or they hold on to their stock in a tough market and hope for a better deal.

That uncertainty is clearly reflected in Longs' stock, which fell 3.3% to $69.30 on Thursday. The stock now fetches $2 less than CVS has promised to pay.

"I'm not sure if that reflects heavy selling from those who bought above the CVS offer price, or whether it shows some skepticism of the CVS deal getting done," says Richard Clayton, research director at CtW Investment Group. "Given the fact that we continue to see substantial deterioration in the credit markets, CVS can't repeat enough that it can actually do this deal."

UBS analyst Neil Currie expects Longs shareholders to accept that offer if it is still there.

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"It's been nearly two months since CVS's original bid of $71.50, and yet no additional bidders have come to the table with a higher offer -- save Walgreen," Currie said Wednesday. "With financing and (regulatory) approval in hand, CVS seems to be the most likely winner of Longs."

That doesn't well with Longs shareholders who believe that management rushed into a deal that throws in some -- if not all -- of the company's real estate for free.

Longs operates 521 drugstores in high-priced markets in areas including California and Hawaii. The company controls a number of valuable leases and owns more than 200 drugstores outright. Using vague and admittedly conservative terms, CVS has valued that property at "more than $1 billion."

But outsiders have come up with far higher values. After conducting a detailed analysis, CtW Investment Group concluded that the portfolio is conservatively worth $1.18 billion to $1.25 billion. Others have since presented higher estimates ranging from $1.5 billion to CVS's $2.9 billion offering price.

As a result, some feel other parties could still come forward with a better deal.

"Last we heard, Pershing Square believed they had other investors who were still interested," CtW's Clayton told

on Thursday. Meanwhile, "it's possible that Longs shareholders may still decline CVS's offer because they continue to believe that the company is worth more."

Currie believes that Longs shareholders should accept the deal they already have. If that happens, he sees a victory of sorts for every party involved.

Chances are, he warns, that Longs would see its performance deteriorate further if negotiations continue to drag on. Instead, he looks for Longs to sell itself to CVS-Caremark -- which has a proven track record of improving operations -- while Walgreen continues to enhance the productivity of the stores it already owns.

Currie has a buy recommendation on CVS, which he ranks as his top drugstore pick, and neutral ratings on both Walgreen and Longs.

Levenson has expressed caution about CVS, however. Late last month, when the credit markets first froze up, Levenson decided to study every retail stock she covered for signs of liquidity risks. Although most of those companies landed in her "no worries" category, CVS fell into a smaller group that caused "moderate concerns."

"Ever since Enron, retailers have been paying more attention to their liquidity and striving to build in some cushion in case access to the commercial paper market should evaporate," Levenson noted at the time. Still, "with CVS ... our concern is sparked by the high level of short-term debt, (which is) likely to go even higher at CVS if it prevails in its bid for Longs."

With Walgreen backing down, however, CVS avoided the bidding war that Levenson had feared.

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