Aug. 13 (Bloomberg) -- CVS Caremark Corp., the second- biggest U.S. drugstore chain, agreed to buy Longs Drug Stores Corp. for $2.7 billion to add pharmacies in the two fastest growing U.S. states.

Longs Drug, based in Walnut Creek, California, has 521 locations in California, Hawaii, Nevada and Arizona, giving CVS a total of about 6,800 stores. The populations of Nevada and Arizona may more than double from 2000 to 2030, according to U.S. Census Bureau projections.

It will be Woonsocket, Rhode Island-based CVS's 10th acquisition in a decade and part of Chief Executive Officer Thomas Ryan's effort to expand on the West Coast. Hedge fund investor William Ackman stands to make an $88 million profit on the more than 3 million Longs shares he bought in the past couple of months.

``It's a great fit and a solid company,'' Andrew Wolf, an analyst at BB&T Capital Markets in Richmond, Virginia, said today in an interview. He lowered his rating on Longs shares today, advising investors to hold the shares, from a previous recommendation of ``buy,'' and doesn't rate CVS.

CVS is also adding Longs' Rx America pharmacy-benefits division, with more than 8 million members, to the Caremark unit it purchased last year.

``This makes all the sense in the world,'' Matt Kaufler, who helps manage about $2.7 billion at Clover Capital Management, said yesterday in an interview. ``My only question: what took them so long?'' The Rochester, New York-based firm owned 449,745 CVS shares through June.

California, Hawaii

It would have taken ``at least a decade'' for CVS to build a comparable presence, in California and Hawaii, Chief Financial Officer David Rickard said in an interview yesterday. California is the most populous U.S. state, accounting for more than one- tenth of the country's population.

Longs Drug investors will receive $71.50 a share, the companies said yesterday in a statement. That's 32 percent more than Longs Drug closed at in New York trading before the announcement.

CVS fell 2 cents to $38.03 at 4:15 p.m. in New York Stock Exchange composite trading. Longs Drug soared $16.66, or 31 percent, to $70.70.

Ackman's Pershing Square Capital Management LP said last week that it took an 8.8 percent stake in Longs Drug.

He purchased 3.14 million shares of Longs Drug in late June and July at prices ranging from $40.47 to $45.92, according to a regulatory filing he made yesterday.

Ackman Profit

If he decides to tender his shares at $71.50, Ackman will make a profit of almost $88 million, excluding trading costs. Ackman also owns swaps related to an additional 5.3 million shares.

``Longs has been going through a lot of improvement over the past few years,'' Rickard said. Longs centralized systems and decision-making, and now ``better fits our way of doing business.''

CVS will expand health and beauty merchandise in the Longs stores and doesn't expect to have to close any locations for antitrust reasons, Rickard said.

Wolf called the price a ``full, but deserved valuation.'' He'd previously estimated that Longs could earn $4 to $4.50 a share annually as a standalone company, and said it could earn more as a part of CVS.

Longs ``has never had the internal efficiencies to match its productivity'' in sales, he said.

Longs Profit

Profit at Longs rose to $96.2 million or $2.52 a share, in the year ended Jan. 31.

The transaction, which includes about $200 million in debt, makes CVS the largest drugstore chain in California, CEO Ryan said during a conference call yesterday. Longs had annual sales of more than $5 billion in the past 12 months, CVS said in the statement.

CVS will shift its share repurchase program to the latter part of 2009, Ryan said during the call. CVS is ``fully committed'' to completing the $2 billion share buyback, he said.

The company said the 200 stores, three distribution centers and three office buildings that Longs owns may be valued at least $1 billion.

CVS was advised by Lehman Brothers Holdings Inc. and Deutsche Bank AG. The firms also provided a $1.5 billion bridge loan commitment. J.P. Morgan Securities Inc. advised Longs.

`Prudent Thing'

``Our company right now is generating so much cash, that we really don't need a lot of financing for a deal this size,'' Rickard said, calling the bridge loan ``a good prudent thing to do so that we don't stretch all our other lines.''

CVS said it expects to realize about $100 million in cost savings next year and up to $150 million the following year. CVS Corp. bought Caremark RX Inc., the second-largest U.S. pharmacy- benefits manager, in 2007 for $27 billion.

``We look at everything and pretty much have,'' Rickard said in response to whether CVS would consider further acquisitions.

``Our company right now is generating so much cash that we really don't need a lot of financing for a deal this size,'' Rickard said.

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net.

Last Updated: August 13, 2008 16:59 EDT