9/5 Stamford-based UST reportedly in takeover talks

Sir Duke · 9/5 Stamford-based UST reportedly in takeover talks

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NYT: Altria to bid $10 billion for smokeless tobacco producer
By Chris Burritt and Thomas Mulier
Bloomberg News
Article Launched: 09/05/2008 12:20:02 PM EDT

UST Inc., the largest U.S. snuff producer, rose in early New York trading after the New York Times reported Altria Group Inc., the maker of Marlboro cigarettes, is in talks to buy the company for more than $10 billion.
A bid that size would value UST at about $68 a share, 26 percent above yesterday's closing price. UST, which produces Skoal and Copenhagen smokeless tobacco, and Altria are in advanced talks, the newspaper said yesterday on its Web site, citing unidentified people with knowledge of the discussions. Altria aims to announce the bid as soon as Sept. 8, though it may make a statement earlier after media reports, the newspaper said.

Acquiring UST would give Altria about 60 percent of U.S. shipments of snuff, a $3.7 billion industry that's growing about 7 percent a year. Altria expects cigarette consumption to decline 3.5 percent this year, forcing it to play catch-up to UST and Reynolds American Inc.'s Kodiak and Grizzly smokeless brands.

"An acquisition of UST should strengthen Altria's position in the total tobacco industry and help to offset an accelerated cigarette volume decline," Judy Hong, a Goldman Sachs Group Inc. analyst in New York, wrote today in a note to clients. She recommends buying Altria shares and has a neutral rating on UST.

UST jumped $12.25, or 23 percent, to $66.25 at 8:37 a.m. before the start of New York Stock Exchange composite trading. Altria gained 4 cents to $20.70.

UST spokesman Tom Fitzgerald said earlier yesterday that the company doesn't comment on merger speculation, which was fueled by Chief Executive Officer Murray Kessler's withdrawal from a Lehman Brothers Holdings Inc. conference in Boston.
The company has a market capitalization of $8 billion, about one-fifth the value of Altria. In New York yesterday, UST jumped as much as 5.4 percent before closing down 4 cents to $54.

A $10 billion bid would value UST at 18.5 times expected 2008 profit. Rival Swedish Match AB trades at a price-earnings ratio of 15.7.

David Sylvia, a spokesman for Richmond, Virginia-based Altria, said the company won't comment on takeover speculation. Mark Rozelle, a UST spokesman in Stamford, Connecticut, didn't reply late yesterday to an e-mail seeking comment.

Altria spun off its Philip Morris International division earlier this year and now concentrates solely on the American market. Altria hired Centerview Partners LLP; Citigroup Inc.; Credit Suisse Group AG; Deutsche Bank AG; Goldman; JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. to advise it on the spinoff, according to data compiled by Bloomberg.

The tobacco company's shares have lost about 9 percent since the company spun off its overseas division on March 28. The international unit contributed about two-thirds of Altria's $13.2 billion in operating profit last year. The company is now left to look for additional sales as health-conscious consumers smoke less or cut back as cigarette taxes rise.

Growth is "likely to remain muted, given an accelerated volume decline and Altria's limited exposure to growing segments within the broader tobacco industry," Hong wrote on Aug. 25.

Hong, who recommends buying Altria shares, wrote in March that there's "a decent likelihood" that Altria will buy UST.

Altria has pledged to enter the market for snuff and snus, finely ground tobacco that doesn't require the user to spit, through product development or an acquisition. It's been testing sales of smokeless products in Atlanta, Dallas and Indianapolis.

Acquisitions have been the preferred means of entry to the smokeless market, which is dominated by UST's Skoal and Copenhagen. Reynolds American, the second-largest U.S. tobacco company, bought snuff maker Conwood Co. in 2006 and is selling Camel snus in New York and other cities.

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

Discounting by rivals hurt UST's second-quarter earnings, released in July. Net income declined less than 1 percent to $139.7 million, or 94 cents a share, the first drop in a year.

Swedish Match, Europe's largest maker of smokeless tobacco, boosted second-quarter revenue on U.S. sales of snuff under its Red Man chewing tobacco brand, Chief Executive Officer Lars Dahlgren told analysts July 18.

ted

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