CVS Caremark Corporation (NYSE:CVS) today took strong exception with a memorandum recently submitted to the Board of Directors of Longs Drug Stores Corporation (NYSE:LDG) by a law firm retained by CtW Investment Group, as follows:

We are aware that the Board of Directors of Longs recently received a memorandum from a law firm retained by the CtW Investment Group, which purports to offer an “independent” antitrust analysis of the regulatory timing and substantive risk posed by a potential acquisition of Longs by Walgreens. While not attempting an exhaustive rebuttal, we feel it is important to point out the basic factual inaccuracies and analytic deficiencies contained in this highly misleading memorandum, which attempts to equate the regulatory risks of a CVS/Longs combination and a Walgreens/Longs combination.

The Analysis Contains Numerous Inaccuracies

Some of the basic inaccuracies in the arguments made in the memorandum include:

• Erroneous calculation of store overlaps. The memorandum claims that “in CVS/Longs, the FTC chose not to engage in a long investigation even though almost 2/3 of all Longs stores overlapped with CVS stores…” While the memorandum did not disclose specifically how it defined an “overlap,” this assertion is plainly inaccurate, since there are 13 Metropolitan Statistical Areas (MSAs) across which Longs operates approximately 200 stores and across which CVS has none. Furthermore, in the San Francisco MSA, Longs has 22 stores while CVS has no retail pharmacies and only one specialty pharmacy and in Oakland, Longs has 62 stores while CVS has no retail pharmacies and only two specialty pharmacies. Thus, approximately 284 of Longs’ 521 pharmacies, or over 54%, are located in MSAs where CVS has zero retail pharmacies.
• Overgeneralization of store overlaps. The memorandum takes Nipomo, California, one of the few isolated overlaps posed by the CVS/Longs transaction, and attempts to use it as a standard example by which the several hundred similar situations posed by a Walgreens/Longs transaction would be judged and approved. There is no basis whatsoever to assume that the discretionary judgment of the FTC staff in one isolated situation would be applied as a rule of decision in a deal that features hundreds of overlaps and high MSA-level concentrations, and says nothing about the outcome of an analysis of the larger third party payor market.
• False statements regarding CVS intention to enter Hawaii market. The memorandum claims that “CVS had plans to enter the Hawaii market,” which “seemed to be of little concern to the FTC.” This claim is patently false, as CVS has never had plans to enter Hawaii. Therefore, the FTC’s handling of CVS/Longs provides no insight into how it would handle the combination of Walgreens and Longs, for which Hawaii would be a problem. As has been publicly disclosed, the “Hawaii problem” is already an area of inquiry in the document request that Longs received from the FTC.
• Inaccurate assessment of Walgreens’ antitrust concerns in Hawaii. The memorandum attempts to finesse the important antitrust problem that Walgreens would face in the Hawaii market—where Longs is by far the largest retail pharmacy—by dropping a footnote to compensate for a huge factual mistake.