Aug. 12 (Bloomberg) -- CVS Caremark Corp., the second- biggest U.S. drugstore chain, said it would buy Longs Drug Stores Corp. for $2.7 billion to expand its reach in the western U.S., closing the gap with larger Walgreen Co.

Longs Drug has 521 locations in California, Hawaii, Nevada and Arizona, giving CVS about 6,800 stores, in line with Walgreen, the Deerfield, Illinois-based chain with 6,849.

This is CVS's 10th acquisition in the past decade and part of an effort by Chief Executive Officer Thomas Ryan 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.

CVS Chief Financial Officer David Rickard said in a 2006 interview that the drugstore chain wanted to expand its presence and was open to doing so through acquisitions. It would have taken ``at least a decade'' for CVS to build a comparable presence, in the ``very, very difficult'' California and Hawaii markets, Rickard said in an interview today.

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

``It's a bit surprising, but I think you're seeing consolidation in general, and it makes some sense,'' David Abella, a portfolio manager at Rochdale Investment Management in New York, said in an interview with Bloomberg Radio today.

Attractive Price

``CVS has significantly higher operating margins than Longs, so if they can increase Longs' margins to the CVS level, then the price will be attractive,'' Abella said.

Rochdale manages $2.5 billion including about 181,000 CVS shares as of June 30.

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

CVS, based in Woonsocket, Rhode Island, fell 49 cents, or 1.3 percent, to $38.05 at 4:15 p.m. in New York Stock Exchange composite trading before the announcement. The shares have declined 4.3 percent this year. Longs Drug, based in Walnut Creek, California, dropped $1.07, or 1.9 percent, to $54.04.

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

Ackman's Stake

Ackman 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 today. If he decides to tender his shares at $71.50, Ackman would receive a profit of almost $88 million, excluding trading costs. Ackman also owns swaps related to another 5.3 million shares.

Ackman declined to comment.

``Longs has been going through a lot of improvement over the past few years,'' Chief Financial Officer David Rickard said today in an interview. 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 stores for antitrust reasons, Rickard said.

The deal includes about $200 million in debt, he said.

The acquisition makes CVS the largest drugstore chain in California, CEO Ryan said during a conference call today.

Longs has annual sales of more than $5 billion and reported earnings before interest, taxes, depreciation and amortization of $276 million in the past 12 months, CVS said in the statement.

Share Buyback

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.

CVS announced the buyback, its third since March 2007, in May. It said then it would repurchase shares this year and next.

CVS said the 200 stores, three distribution centers and three office buildings that Longs owns are worth at least $1 billion.

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

``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.

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

Last Updated: August 12, 2008 21:07 EDT