Marlboro-maker Altria looking to buy smokeless tobacco company UST for $10 billion

Shares of UST, US's largest snuff producer, soared more than 22 per cent Friday morning on reports that Altria Group, the maker of Marlboro cigarettes, is in advanced talks to buy the smokeless tobacco and wine maker for $10 billion.

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. The reported offer price is about $68 a share, 26 per cent above Thursday's closing price.

UST, the maker of the Skoal and Copenhagen smokeless tobacco brands, has a current market capitalization 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, where Altria's efforts to leverage its Marlboro brand have yet to bear fruit.

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.

UST spokesman Tom Fitzgerald said earlier yesterday that the company doesn't comment on merger speculation, which was fueled by CEO Murray Kessler's withdrawal from a Lehman Brothers Holdings Inc. conference in Boston.

Speculation of a deal comes as Altria suffers an accelerating decline in domestic cigarette sales at home. 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 U.S. 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)

Shares of UST were up more than $12 at $66.13 while Atria gained 1.6 per cent to $21.