Debt Policy at Ust

DEBT POLICY AT UST Inc.

B.B.Chakrabarti IIMC

THE ISSUE

UST planning a major change in capital structure via a debt-financed stock repurchase program Dec 98 UST Board approved a plan to borrow $1 billion over 5 years

UST - BACKGROUND

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175 year old company Dominant producer of moist smokeless tobacco Uninterrupted cash dividends since 1912 One of the most profitable American companies 5-year ROCE of 92.1% Increasing EPS and Share price P/E ratio = 13.8

SMOKELESS TOBACCO MARKET (1998)

 $2 bn in retail revenue  5 mn consumers of moist smokeless

tobacco  7 mn consumers of chewing tobacco  Moist smokeless tobacco fastest growing segment at 3.7% annual growth over past 17 years against 2% annual decline in cigarettes

UST and COMPETITION

UST Ph. Morris Median-ex UST GPM 80.1 41.7 28.0 NPM 32.9 10.3 2.7 ROE 103.4 49.3 22.5 ROA 53.8 13.2 3.1 Debt/ Mkt Eq. 1.5 10.1 49.8 EBITDA Int. Cov. 105.6 12.7 4.1 Debt Rating A

LITIGATION and LEGISLATIVE ENVIRONMENT

 Litigation and legislation are everyday

occurrences  7 pending health related lawsuits (98)  UST to pay $100 - $200 mn over 10 years as part of Smokeless Tobacco Master Settlement Agreement to settle Medicaid disputes (Nov 98)  Lawmakers to continue to push new laws against tobacco use

UST – FINANCIAL RESULTS

Net Sales EBIT EPS GPM NPM ROE Div Payout 5-Yr CAGR 5% 6% 9% 79.7% 32.7% 122.8% 61.6% 10-Yr CAGR 9% 11% 13% 77.3% 31.3% 89.1% 51.4%

WALL STREET OUTLOOK

In late 98, analysts maintain neutral rating on UST. Reasons - Continued threat of price-value competitors - Softening smokeless tobacco market - No international expansion - Lackluster performance of non-core operations - Public and political sentiment against tobacco

UST – ATTRIBUTES and RISKS VIEWPOINT OF BONDHOLDER

Brand Name and Market Position - Dominant Producer with 77% market share - Largely insulated from competition due to advertising restrictions Cash Flow Generation - Cash cow Expected to...