Ust Case Summary

Summary of key facts

• Action: UST to borrow up to $1 billion over 5 years

• Goal: Accelerate stock buyback program

• What UST does: Leading producer of moist smokeless tobacco products

• UST Past: Known for conservative debt policy and high dividend payout

• Events

○ In December 1998, UST Board of Directors approved plan to borrow up to $1 billion over 5 years

○ In 1997, UST suspended stock buyback program which was approved in 1996 because of legal and legislative issues confronting the tobacco industry

○ In November 1998, UST signed the Smokeless Tobacco Master Settlement Agreement -> resolving potential state Medicaid liability and reinstated its repurchase program

○ Management believed this represented significant process in respect to legal and legislative issues confronting the company permitting UST to proceed with its business strategy and potential recapitlization

○ In 1997, rather than cut prices to counter growth of value players, UST introduced Red Seal brand tobacco to compete with price value bands and preserve pricing power and profitability of premium brands

§ Analysts felt UST too slow in responding to value competitors

§ Value segment gained 9% market share already, making Red Seal had to compare with already successful brands

○ Another 1997 product introduction of Copenhagen Long Cut in response to Conwood full price Kodiak brand

§ UST had to succumb to pressure to introduce a competitive product after continued market share losses

○ Rooster introduced in 1998 to provide more tobacco for conumers money

• Smokeless Tobacco Market

○ Generated $2 billion of retail revenue in 1998

○ Approx 5 million consumers of moist smokeless tobacco and 7 million consumers of chewing tobacco including loose leaf, twist, plug and dry

○ Moist smokeless tobacco consumption about 50% of total

○ USDA reported moist smokeless tobacco has been the fastest growing segment of the tobacco industry with volume...