Altria Discounts Reports of UST Deal / Philip Morris Parent Calls Acquisition Talk ‘Pure Speculation’

The parent company of cigarette-maker Philip Morris USA yesterday said reports that it was close to acquiring smokeless tobacco company UST Inc. were “pure speculation.” Some analysts, however, said the deal would make sense for Henrico County-based Altria Group Inc., as the company looks to build its business to offset shrinking cigarette consumption.

Shares of UST, which makes Skoal and Copenhagen, soared more than 25 percent yesterday after The New York Times reported that Altria was in discussions to buy the company for more than $10 billion. An official announcement could come as early as Monday, according to the report, which cited unidentified sources.

Stock of Connecticut-based UST closed at $67.55, up $13.55. Altria shares rose 29 cents, or 1.4 percent, to $20.95.

“As a matter of policy, we don’t comment on speculation of this kind, period,” said David Sutton, a spokesman for Altria.

Tom Fitzgerald, a spokesman for UST, also declined to comment. UST is the nation’s leading maker of moist smokeless tobacco products.

Analysts have speculated for months that Altria might buy a smokeless tobacco company. While Altria expects cigarette consumption to decline about 3.5 percent this year, an acquisition of UST would give it a leading position in a $3.7 billion category of the tobacco business that is growing about 6 percent to 7 percent a year.

“From a strategic point of view, [the] logic of a deal looks indisputable,” analyst Marc Greenberg of Deustche Bank wrote in a research note to investors.

Altria spun off its growing international cigarette business in March. Its domestic subsidiary, Philip Morris USA, is the largest U.S. cigarette company, but it has no foothold in smokeless tobacco.

The company has been test marketing its own moist snuff and pouch tobacco using the Marlboro brand name, its most popular cigarette. After more than a year of test marketing, the company has not released sales results or plans for a wider rollout. Some analysts have said sales have been slow.

“It is very difficult for a company in one sector to just dive into another sector,” said Darryl Jayson, vice president of the Tobacco Merchants Association, a trade group in Princeton, N.J. “That is not just with tobacco, but with most consumer products.”

Altria’s largest competitor, Winston-Salem, N.C.-based Reynolds American Inc., acquired smokeless tobacco maker Conwood LLC in 2006.

Acquiring UST would give Altria about 60 percent of U.S. shipments of snuff.

“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, wrote in a note to clients.

UST has said one of its growth strategies is to convert adult smokers from cigarettes to smokeless tobacco as more indoor smoking restrictions are passed.

The company reported profit of $520 million in 2007, up 2.9 percent from 2006, on revenue of $1.9 billion. About $1.5 billion of its sales came from smokeless tobacco. The company also produces and distributes a wine, which contributed $354 million to its revenue.

After the report of the possible acquisition, the cost to protect Altria Group Inc. bonds from default jumped to the highest in almost six months.

Credit-default swaps on Altria climbed 16 basis points to 91 basis points, according to CMA Datavision in London. That’s the highest since March 18, the week after the collapse of Bear Stearns Cos. caused credit- default swap prices across the market to soar to a record.

A merger would increase debt levels for the combined entity and introduce tobacco-related litigation risk to UST, Barclays Capital analyst William Nonneman wrote in a note to clients.

– Staff writer John Reid Blackwell, The Associated Press and Bloomberg News contributed to this report.

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MEMO: BREAKING NEWS 9/05/08 5:20 PM on inRich.com

Originally published by Staff and Wire Reports.

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