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Cigarette Maker Strikes Deal For Dip

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The Associated Press

Published: September 9, 2008

NEW YORK - 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 smoking declines.
American smokers are buying fewer cigarettes as smoking bans and health concerns dampen demand by 3 to 4 percent a year. That has forced tobacco companies to look for sales growth from alternatives such as cigars, chewing tobacco and snus - teabaglike pouches that are popular in parts of Europe. Smokeless sales are growing about 5 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 Chief Executive Officer Michael Szymanczyk said Monday that Altria began seriously thinking about a UST deal after the spinoff, and he called UST CEO Murray Kessler at the end of May to revive discussions that they had been having on-and-off.

Szymanczyk also said the company will 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.

Worldwide, the tobacco industry has been consolidating. Imperial Tobacco Group PLC bought Franco-Spanish company Altadis in January; Rothmans, the Canadian cigarette company, is being bought by former Altria subsidiary Philip Morris International; and Reynolds American 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 Friday as the market anticipated a deal.

UST shares rose $1.35, or 2 percent, to $68.90 on Monday, and Altria rose 2 cents, to $20.97.

The $10.4 billion price 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 said Altria could sell off the wine business as well as a stake it has long held in brewer SABMiller PLC.
Altria expects to earn $1.63 to $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.

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