Debt Policy Ust

Key Issues

UST is an industry leader in the smokeless tobacco industry with control of approximately 77% percent of the domestic market. UST has historically been one of the most profitable companies in not only the tobacco industry, but also corporate America with a 5-year return on capital of 92.1%. The company is also well known for its conservative debt policy and high dividend payout. In an effort to recapitalize, the UST board of directors has approved a plan to borrow up to $1 billion over five years to accelerate its buyback program. An analysis must be conducted to project future performance, as well as decide whether to undertake the recapitalization plan and if so, what impact it will have.

Business Risks

Within the tobacco industry, as well as within the company itself there are many risks associated:

* There is very little product differentiation across the industry, which makes brand recognition and continued market share an absolute necessity.

* The industry itself has a history, and likely a future, of litigious difficulties. There are several pending lawsuits wrapping up even now.

* Increasing restrictions on tobacco use and the promotion of it will likely lead to a downturn in future demand. With smokeless tobacco not yet being targeted as heavily as smoking tobacco producers, this is likely a more distant future concern.

* Not only are regulations in the industry becoming more stringent, consumers themselves are more informed and more aware of the health consequences of tobacco products. With an increasing emphasis on a healthy prolonged life, we can expect future demand for tobacco products to decrease.

* Smokeless tobacco products are quite uncommon outside of North America. Given this, it is very difficult to expand operations to an international scale.

* UST derives a very large percentage of its revenues (88%) and its operating profit (97%). While this is the industry they choose to be involved in, an...