Walgreen walks away from Longs Drug bid; Service Corp-Stewart deal dead; Wachovia truce extended

By Paul Deckelman

New York, Oct. 8 - Two potential takeover deals were suddenly shelved on Wednesday, one largely a victim of the continued market credit crunch, and the other done in by the inability of the two parties to come to a meeting of the minds.

Walgreen Corp. said late in the day - well after stock trading had wrapped up for the day - that it was withdrawing its $2.8 billion offer for Longs Drug Stores Inc. Chicago-based Walgreen, the largest U.S. pharmacy chain operator, cited Longs' unwillingness to enter into talks and the growing financial crisis hitting the nation's economy. However, Longs management views Walgreen's move as no great loss, since it never embraced the offer anyway, preferring to instead stick with its earlier agreement to be bought for somewhat less money by Walgreen's main rival, CVS Caremark Corp.

Earlier in the session, investors and traders firing up their computers were greeted with morning headlines indicating that Service Corp. International had on Tuesday night with drawn its $1.5 billion offer to buy rival funeral home and cemetery operator Stewart Enterprises Inc. Houston-based Service Corp., the industry leader, blamed what it considered unreasonable demands by its smaller rival to get a deal done. Stewart - whose shares got buried Wednesday on the news - meantime expressed surprise at the turn of events and said it was still open to a deal.

While those deals appeared to be going under, all of the parties involved in what may be one of the biggest-ever financial M&A deals - the tussle between Citigroup Inc. and Wells Fargo & Co. over which banking giant will get the lion's share of the goodies that currently belong to the beleaguered Wachovia Corp. - agreed to a two-day extension of the temporary truce that has for the moment stilled the conflicting lawsuits filed in the case, giving the parties and federal regulators trying to broker a peaceable breakup of Wachovia additional time to achieve such an outcome.

Elsewhere in the banking sector, Bank of America Corp.'s shares slid as the big Charlotte, N.C.-based lender priced its $10 billion stock offering - at a discount to previously anticipated levels in view of the drubbing that the financials have recently taken, which has accelerated over the past few sessions.

Another walloping for Wall Street

While all of that was happening, equities generally took another brutal beating, after first gyrating around, zigzagging back and forth several times between advances and retreats before finally sliding in the last hour. The bellwether Dow Jones Industrial Average ended down another 189.01 points, or an even 2%, its sixth straight loss. It was almost exactly one year ago, on Oct. 9, 2007, that the widely followed market gauge hit its all-time peak level of 14,164.53, but things have all gone downhill since then, with the index shedding more than a third of its value, nearly 5,000 points, in the interim to close Wednesday at 9,258.10.

Other equity indexes were likewise getting clobbered; the Nasdaq fell 14.55 points, or 0.83%, to finish at 1,740.33, while the Standard & Poor's 500 index was down 11.29 points, or 1.13%, to close at 984.94.

When the U.S. equity market opened, participants were greeted with the news that the Federal Reserve Open Market Committee, acting in concert with central banks from around the world, had lowered key lending rates by 50 basis points in an emergency move aimed at greasing up the frozen wheels of an international financial system that has seized up and essentially shut down. Significantly, the Fed felt that it could not wait until its regular meeting, scheduled for three weeks from now, in lowering its federal funds rate target for overnight bank borrowing to 1.5%, while also bringing down the discount rate for borrowing directly from the Fed by 50 bps to 1.75%.

While the central bankers hoped that the coordinated rate cuts would restore some semblance of confidence in the financial markets, the result Wednesday was anything but, with U.S. equities jumping wildly around before sliding in the last half hour to close lower on renewed investor fears of an economic downturn.

Walgreen walks out on Longs

The current unsettled market conditions were enough to convince Walgreen to drop its pursuit of Longs Drug Stores - not that the Walnut Creek, Calif.-based regional drug store operator really cares much.

Longs, which operates over 500 retail outlets in California, Nevada and Hawaii, has said all along that it plans to be acquired by Number-Two national drug chain CVS Caremark in a $2.7 billion deal that had dismayed some of the company's large shareholders, who noted the disparity between CVS's bid, for $71.50 per share, and Walgreen's offer of $75 per share. Several large holders, notably William Ackman's Pershing Square Capital Management LP, had expressed opposition to the CVS offer, raising the specter that Longs management might not get the two-thirds majority in favor of the CVS deal that it was seeking. Longs has long contended that a combination with the larger Walgreen faced all kinds of antitrust hurdles that a deal with the somewhat smaller CVS did not.

Steven Shubitz, an analyst at Edward Jones & Co., said in a research note late Wednesday that there had been "a pretty high expectation that if Walgreen had not withdrawn its bid, that CVS would have come back to the table and given a higher bid."

But with Walgreen now apparently out of the picture - it said in a statement that it was dropping its offer because of Longs' "repeated refusal to accept our invitation to engage in a constructive dialogue that could lead to a mutually beneficial transaction, and the substantial deterioration in the national economic outlook over the past few weeks" - Woonsocket, R.I.-based CVS would seem to be in the driver's seat.

It said late Wednesday that "we look forward to completing our merger with Longs. . . It is fully financed, has cleared all regulatory hurdles and is ready to close." CVS is currently tendering for all of Longs shares at $71.50, in an offer that has been extended to midnight on Oct. 16. It expects to complete the acquisition by the end of the year.

Longs Drug Stores (NYSE: LDG) closed the regular session down 8 cents, or 0.11%, to $71.68, on volume of 953,000 shares, about 25% under the usual turnover. But in after-hours dealings, after Walgreen's withdrawal was announced, it fell a further $1.66, or 2.32%, to $70.02. Walgreen (NYSE: WAG) was off 56 cents, or 2.09%, to $26.18, on volume of 12.2 million shares, 1½ times the norm. CVS Caremark (NYSE: CVS) was up 71 cents, or 2.44%, to $29.84, on volume of 12.2 million shares, about 10% more than usual.

Service Corp. bid for rival Stewart dies

Unlike Walgreen's departure - which will leave Longs and CVS free to combine, assuming enough Longs shareholders are resigned to the fact of having nowhere else to go now - Service Corp. International's decision late Tuesday to walk away from its $11 per share offer for smaller industry rival Stewart Enterprises means the death of any investor hopes for an acquisition of the Jefferson, La.-based funerary operator, since there are no other offers on the table for it, and Stewart's shares (Nasdaq: STEI) reacted accordingly, falling $2.09, or 29.48%, to an even $5, on volume of 3.3 million, over three times the average daily turnover.

Service Corp. had originally offered $9.50 per share for Stewart back in July, which the latter company had rejected as "inadequate," causing Service Corp. to come back with the $1.04 billion buyout bid which it finally withdrew on Tuesday night.

In withdrawing the offer, Service Corp.'s chief executive officer, Thomas Ryan, wrote to his counterpart at Stewart, Thomas Crawford, that Crawford's company had imposed unacceptable preconditions, including demands that that larger company "accept all financing risk of a transaction..., accept all regulatory risk on antitrust clearance and, in addition, increase its $11 a share proposal."

Stewart - which just last week had hired Goldman Sachs & Co to weigh its strategic alternatives in the wake of Service Corp.'s unsolicited bid, professed disappointment at Service Corp.'s decision. Crawford said that said the company would continue to assess alternative plans - but was keeping the door open to further talks with Service Corp.

Service Corp. (NYSE: SCI) was up 32 cents, or 4.45%, to $7.51, on volume of 4.2 million shares, or 2½ times the norm.

Wachovia truce extended

The relative harmony between the three parties in the Wachovia-Citigroup-Wells Fargo standoff that has prevailed since Monday will prevail at least a little longer, until Friday, as those parties, with the assistance of the Federal Reserve, attempt to work out what one of the lawyers involved called a "grand solution" that will in theory untie the Gordian knot and solve the problem of how to keep Wachovia from going down the tubes like several other large financials have recently, by an orderly division of its assets between Citi and Wells Fargo.

A federal judge extended until noon ET on Friday a standstill agreement, freezing for now any federal or state court litigation between the parties. Lawsuits had been filed by the various interested parties in the state courts in New York and Wachovia's home base in North Carolina, as well as at the federal court level.

Analyst Kevin Fitzsimmons of Sandler O'Neill & Partners said in a research note Wednesday that the legal ceasefire agreement was "an encouraging sign.

"It also could signal the commitment of the regulators to reach a resolution and prevent this situation from being dragged on in the courts," he said.

After Citi last week announced an apparent deal, brokered by federal regulators, for it to pay $2.16 billion for Wachovia's network of more than 3,000 retail branches and assume some $42 billion of the latter bank's mortgage portfolio losses - Washington would be on the hook for the rest - the New York-based banking giant was shocked when Wachovia and Wells Fargo announced their own deal for the San Francisco-based Wells Fargo to acquire all of Wachovia - its insurance and brokerage operations as well as the retail bank branches - for $7 per share, or $15 billion total. After that, the lawsuits began flying, with Citi claiming the exclusivity rights in its deal for Wachovia's branches had been violated, while Wells and Wachovia contended that the memorandum of understanding between Citi and Wachovia was not a definitive deal.

Most observers believe that should the Fed be able to broker a deal, Wachovia would be divided along geographic lines. Citi would likely get Wachovia's branches in the Northeast and Midwest, with Wells Fargo getting the branches in the West and the South. One plan calls for Citi to get about one quarter of Wachovia's deposits, and Wells Fargo the rest.

Wachovia (NYSE: WB) fell 19 cents, or 3.62%, to $5.06. Volume of 68 million shares was a bit more than half the usual handle. Citigroup (NYSE: C) lost 75 cents, or 4.95% to end at $14.40, on volume of 156 million shares, 20% more than usual. Wells Fargo (NYSE: WFC) gained $1.30, or 4.25%, to $31.90. Volume of 57 million was a little smaller than usual.

B of A raises capital - at a discount

Bank of America's shares fell Wednesday as the banking giant announced that it had sold some $10 billion of new shares - but analysts raised their eyebrows at the $22 per share price, which was significantly below expectations.

Also pushing the shares down was the news later in the session that B of A was among several banks which agreed to buy back billions of dollars of auction-rate securities in a settlement with regulators. That will set it back some $4.7 billion - this on top of the roughly $8 billion that the bank earlier in the week agreed to pay to resolve suits brought by 11 state attorneys general against its recently acquired Countrywide Financial Corp. mortgage lending unit for allegedly predatory lending practices.

After the close of trading Tuesday, B of A priced 455 million shares at $22 per share - 7.5% below Tuesday's closing price of $23.77, and fully one-third less than the closing price of $33.22 on Monday, when the capital-raise was initially announced. The bank said that the offering should generate net proceeds of about $9.8 billion after expenses, or $11.2 billion if the underwriters fully exercise their greenshoe overallotment option.

However, said analyst Jeff Harralson of Keefe, Bruyette & Woods, that's less than the originally anticipated proceeds of about $11.5 billion, to be generated by issuing about 418 million shares at $27.50 apiece.

While less than the market had hoped for, he said in a research note, "we believe the shares could benefit from the ultimate completion of the deal."

B of A (NYSE: BAC) lost $1.67, or 7.03%, to $22.10, on volume of 322.7 million shares, over three times the usual action.

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