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Rx for Longs Drug Stores: An Urgent Sale

Some big stockholders of Longs Drug Stores (LDG) are tired of waiting for a cure for the chain's chronic ills: missed targets and slumping shares. "For years, management has promised to fix what's wrong, but we're still waiting," says Franklin Morton of Ariel Capital Management, which owns 12%. For years, Longs has been undermanaged, he says, often causing the company to miss forecasts. The relief investors hanker for: sale of the company.

A manager of a hedge fund, who asked not to be identified, with more than 5% of the stock, says a leveraged buyout group is "casing" Longs. And Safeway, rumored to have been rebuffed by Longs two years ago, is said to be readying a new bid. The stock has dropped from 32 a year ago to 14.24 on May 14. Morton says, if managed right, Longs could be worth 25. Takeover talk is fueled by Longs' unleveraged balance sheet and huge real estate assets, notes analyst Meredith Adler of Lehman Brothers (LEH) But she rates Longs underweight because of its "poor operating performance and uncertain outlook." Adler says earnings will drop to 83 cents a share in the year ending Jan. 31, 2004, down from 92 cents in 2003. In 2005, she expects 88 cents.

Ariel Capital, which has urged Longs to sell, may again press the matter at the stockholders meeting on May 20. Longs is in a "quiet period," so it can't comment on a buyout, says a spokeswoman.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them. By Gene G. Marcial

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