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Altria Group buying UST for $10.3B

September 8, 2008 5:22:18 PM PDT
Altria, the U.S. leader in cigarettes, wants to be No. 1 in smokeless products too. The owner of the nation's biggest cigarette seller said Monday that it will buy UST, the maker of Skoal and Copenhagen, in a $10.4 billion deal that is part of the wider consolidation of the global tobacco industry.

Observers say Lorillard, which was spun off from Loews Corp. in June, could be next on the list of potential targets.

"It's going to put pressure on everybody else to consolidate," said Sachin Shah, an analyst with iCap Equities. Shah said tobacco leaf producer Universal Corp. and Vector Group Ltd. could also be potential targets.

Altria owns the Marlboro brand and the nation's biggest cigarette maker, Philip Morris USA. It has been test marketing Marlboro brand smokeless products, but analysts say the results have been disappointing so far. Its acquisition of UST will give it a strong position in smokeless tobacco, a segment of the U.S.

market that is growing as cigarettes decline.

American smokers are buying fewer cigarettes as smoking bans and health concerns dampen demand by 3 percent to 4 percent a year.

That has forced tobacco companies to look for sales growth from alternatives such as cigars, chewing tobacco and snus, teabag-like pouches that are popular in parts of Europe. Smokeless sales are growing by about 5 percent to 6 percent a year.

Expanding its presence in the smokeless part of the market has become more urgent for Philip Morris USA after its parent spun off its bigger-earning overseas counterpart, Philip Morris International, in March.

Altria CEO Michael Szymanczyk said Monday that Altria began seriously thinking about a UST deal after the spin-off, and he called UST CEO Murray Kessler at the end of May to revive discussions that they'd been having on-and-off.

Szymanczyk also said the company would continue to pursue growth of Marlboro brand smokeless products.

"This doesn't remove the opportunity for smokeless from an organic point of view," he said. "That is something we continue to work on."

The company has been conducting market tests of Marlboro moist smokeless tobacco in the Atlanta metropolitan area and Marlboro snus in Indianapolis and Dallas-Fort Worth since January. It also bought cigar maker John Middleton Inc. in December 2007.

Worldwide, the tobacco industry has been consolidating. Imperial Tobacco Group PLC bought Franco-Spanish company Altadis in January; Rothmans Inc., the Canadian cigarette company, is being bought by former Altria subsidiary Philip Morris International; and Reynolds American Inc. bought smokeless company Conwood Co. in 2006.

Under the deal announced Monday, Richmond, Va.-based Altria will buy Stamford, Conn.-based UST for $69.50 per share in cash, a 3 percent premium to UST's closing price Friday of $67.55. That comes on top of a 25 percent rise in UST's shares on Friday as the market anticipated a deal. UST shares rose $1.35, or 2 percent, to $68.90 on Monday, while Altria rose 2 cents to $20.97.

The $10.4 billion price tag is based on 147.5 million shares outstanding as of July 31, plus a number of restricted shares and options. Altria valued the deal at $11.7 billion, which includes about $1.3 billion in UST debt. UST will become a wholly owned subsidiary of Altria.

Altria will also get Ste. Michelle Wine Estates, a premium wine business, as part of the deal. If it wants to position itself as purely a tobacco company, some observers believe Altria could sell off the wine business as well as a stake it has long held in brewer SABMiller PLC.

For the moment, Altria still expects to earn between $1.63 and $1.67 per share from continuing operations in 2008. Analysts polled by Thomson Reuters expect profit of $1.67 per share for the year.

Altria said it expects the deal to add to its earnings per share within a year after it closes, although Szymanczyk declined to estimate when that might be. He would say only that it was "a bit hard to predict that at this point in time, but we would hope that we get that accomplished as rapidly as possible."

The integration should generate about $250 million in cost savings by 2011, the company added, mainly from reduced selling, general and administrative expenses.

Because of the deal, Standard & Poor's Ratings Services put Altria's debt on watch with negative implications. S&P rates the debt a "BBB+," which implies adequate ability to repay but that adverse or changing conditions would weaken that ability.

Moody's affirmed all ratings on Altria but revised its outlook to "Negative" from "Stable." Its debt is rated "Baa1," or medium investment grade. Moody's also put UST debt under review for possible downgrade. Its debt is currently rated higher than Altria's at "A3," or upper-medium investment grade debt.


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