Could CVS Caremark's pending $2.61 billion purchase of Longs Drug Stores come undone?

Dissident shareholders hope so, having intensified their campaign to disrupt the deal just as the proceedings hit the home stretch. Their potential wedge is the value of Longs' real estate.

Longs' largest stakeholder, the hedge fund Advisory Research, has renewed calls for the Walnut Creek, Calif., drugstore chain to release details about its real-estate holdings. Longs owns as much as 20% of its 500 stores, and where it doesn't own, it holds long-term leases struck long before real-estate prices boomed. Its stores also are in high-traffic areas, such as town centers.

Investors say that means Longs should be fetching more than the $71.50 offered by Woonsocket, R.I.-based CVS. Longs shares have been trading above the offer price as investors bet that something will happen -- another, higher bid or a renegotiation for a higher price. One shareholder told Deal Journal, "Some of these stores could be Guccis!"

The problem is gauging the value of such holdings, specifically the leases. Advisory Research has argued for several years that Longs should disclose more information about its real estate so that shareholders could properly determine the value. For its part, CVS has said the real-estate value accounts for more than a third of what it is paying for Longs.

Advisory Research renewed its appeal two weeks ago, says Advisory Research Chairman David Heller, but the drugstore chain refused, citing the potential that the information could be used by competitors. In an interview, Mr. Heller retorted that Longs' biggest rivals are aware of that real estate's value, as Walgreen's lost out in the bidding for Longs and CVS is buying the company. "What is in the best interest of the company is to let shareholders know what they own. We can only make an enlightened decision if we can know the facts," Mr. Heller said.

Sept. 15 is the date shareholders are to begin tendering their shares. Dissatisfied Longs shareholders argue that the deal agreement allows shareholders to wait as long as August 2009 before tendering. They hope other shareholders will hold off voting long enough for Longs to disclose the value of the real estate, for CVS to raise its offer or for another bidder to jump the deal. CVS didn't return a phone call seeking comment.

Some hope Walgreen's will make another run. Another name mentioned is Wal-Mart Stores. Wal-Mart is exploring a "small-box" strategy to open pharmacies and "mini-Wal-Marts," and Longs' drugstores usually are large: around 25,000 square feet, compared with roughly 16,000 square feet at Walgreen's. Wal-Mart also could pay market value for Longs' inexpensive leases, dissidents argue. Wal-Mart and Walgreen's declined to comment.

Working against the idea of another bidder is that Longs' adviser, J.P. Morgan Chase, isn't allowed to shop the company to other buyers or entertain other offers, and the CVS deal's breakup fee, at $115 million, is a relatively hefty about 4% of the deal's value.

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