labels: M&A
Marlboro maker Altria to acquire UST for $10.4 billion news
08 September 2008

Mumbai: Altria Group Inc, the maker of Marlboro cigarettes, has agreed to acquire smokeless tobacco and wine maker UST Inc for $10.4 billion, or $69.50 a share, in cash, the companies said on Monday.

Altria will also assume about $1.3 billion in debt to combine the Marlboro cigarette brand with the Skoal and Copenhagen smokeless tobacco products.

The price represents a 29 per cent premium to UST's closing price on Thursday, the day before news of a possible deal broke.

UST, which commands a 58 per cent share of the US smokeless tobacco market, also owns the Ste. Michelle Wine Estates.

It's main business, however, has been pressured by soaring gasoline prices and the weak US economy.

The acquisition would be Altria's first since it spun off Philip Morris International in March to free its overseas unit from the overhang of slumping US cigarette sales and litigation worries.

UST, the maker of the Skoal and Copenhagen smokeless tobacco brands, has a current market capitalisation of $8 billion and last year posted sales of $1.95 billion. A tie-up would boost Altria's position in the still-growing market for snuff.

Rival Reynolds American moved first into the smokeless category, buying Conwood, maker of Copenhagen, for $3.5 billion in 2006. Currently, it also has the Kodiak and Grizzly smokeless brands in its portfolio.

The deal comes amidst accelerating decline in Altria's  domestic cigarette sales. Last week the company lowered its outlook on US industry-wide cigarette volumes, citing economic conditions, rising cigarette taxes and retailer inventories. In the long term the company expects US industry volume to fall 3 per cent to 3.5 per cent a year, compared to a March view of 2.5 per cent to 3 per cent.

Still, Altria backed its forecast for 2008 earnings in the range of $1.63 to $1.67 a share. At the time, of the results, chief financial officer David Beran said Philips Morris USA believes it can offset declining cigarette sales by moving aggressively into the smokeless tobacco and spit-free tobacco pouches. The company is also facing major lawsuits related to cancer-related deaths. (See: US Supreme Court agrees to hear Philip Morris appeal in $79.5 million damages case)

While the smokeless market is dwarfed by the $70 billion spent on cigarettes in the US annually, it's expanding about 6 per cent a year, according to UST. Reynolds American's snuff brands added $670 million, or 7.4 per cent of revenue, last year.

Late last year, before the PMI spin-off, Altria purchased cigar maker John Middleton for just under $3 billion in another attempt to tap into one of the tobacco sector's few robust domestic categories. (See: Altria to buy cigar maker John Middleton for $2.9 billion)

Altria expects the acquisition of UST to be accretive to adjusted diluted earnings per share within 12 months of closing. Reduced expenses are expected to help create about $250 million in synergies from the deal by 2011, it said.

Altria expects to maintain a dividend payout ratio of approximately 75 per cent following the deal. The combined company is expected to generate $4 billion in cash from operations, the company said.

In order to finance the deal, Altria cut its share repurchase authorization to $4 billion over the next three years from its current $7.5 billion two-year plan.

Altria received financing of around $7 billion from Goldman Sachs & Co and JP Morgan for the deal.

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Marlboro maker Altria to acquire UST for $10.4 billion