Betting on a Longs Buyout

Long’s Drug Stores (LDG) shares have been roiling after a $71.50 per share tender offer by CVS Caremark (CVS) was questioned by several large shareholders. These shareholders believe the offer substantially undervalues shares of the drug chain on the basis of its real estate holdings and pharmacy businesses. Many believe that Long’s true value lies closer to $90 per share. So, should investors jump in purchase this stock in hopes of a higher bid?

Bill Ackman of Pershing Square is one of the loudest opponents of the CVS deal despite the tender offer being approved just days after he announced his stake in the firm. The activist investor believes that Long’s real estate alone is conservatively worth $2.9 billion, which means CVS would be getting the pharmacy business and underlying company for “free”. Using comparable sales and income figures, Ackman estimates the true value of Long’s at between $90 and $95 per share.

The Long’s tender offer is also interesting insomuch as it is open until August of 2009. This means that many large shareholders are in no hurry to tender their shares. Meanwhile, those who buy the stock right now are able to essentially have a “put option” at $71.50 while still being able to collect dividends on their investment until that point. While the company recently rejected a bid by Walgreen’s at $75 a share, many experts still believe a higher offer is likely in the cards.

Many experts believe that stock options may be the best way to play this opportunity. The March ’09 call options are considered the safest given the lengthy tender offer timeframe and offer investors the opportunity to play this stock at a cheaper price. The March $80 calls are trading at just $0.40 while the $75 calls are trading at $3 each. This means that if a $90 per share offer did come in, the $80 calls would become worth $10 each while the $75 calls would be worth $15 each. The only risk is if the final offer or tender comes in below $75 per share.

Longs Drug Stores Corporation operates in two business segments: retail drug stores, and through its RxAmerica subsidiary, pharmacy benefit services. Through the Company’s retail drug store segment, it is a retail drug store chain on the West Coast of the United States and in Hawaii, with 510 stores as of January 31, 2008. Longs Drug Stores Corporation’s retail drug store segment also operates a mail order pharmacy business. The Company’s pharmacy benefit services segment provides a range of services related to pharmacy benefit management, including plan design and implementation, claims administration and formulary management to third-party health plans and other organizations.

 Email This Story
Join LEAPSInvestor.com