September 12, 2008

Altria to Buy UST / $10.4 Billion for Smokeless-Tobacco Firm; Deal is No Surprise

With Americans smoking less, the nation's top cigarette maker is planning to go smokeless in a big way. In a move long-anticipated by industry observers, Altria Group Inc., parent company of Marlboro- maker Philip Morris USA, said yesterday it has agreed to pay $10.4 billion to acquire Stamford, Conn.-based UST Inc., the top manufacturer of moist smokeless tobacco.

The deal, if approved by UST shareholders and federal regulators, will add a growing category of tobacco products to Henrico County- based Altria's portfolio as the company faces a slowly eroding U.S. cigarette market.

"The acquisition will give Altria immediate national scale in the highly profitable [moist smokeless tobacco] category," said Michael E. Szymanczyk, Altria's chairman and chief executive officer, in a conference call with analysts yesterday.

Cigarette consumption is declining at about 3 percent to 4 percent a year, but industry volumes in smokeless tobacco have been growing about 7 percent for two years, he said.

Altria's Philip Morris USA subsidiary, which employs about 5,600 people in the Richmond area, dominates the U.S. cigarette market but has virtually no presence in the $3.7 billion smokeless tobacco market.

Its largest competitor, Winston-Salem, N.C.-based Reynolds American Inc., got into smokeless in 2006 by acquiring the second- largest U.S. manufacturer, Conwood LLC, which makes the Grizzly and Kodiak brands. The company has been putting price pressure on UST's premium brands, Skoal and Copenhagen.

Last year, Altria took its first major step outside of cigarettes, adding cigars to its portfolio by acquiring Pennsylvania- based John Middleton Inc. for $2.9 billion.

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Including assumed debt, Altria said it would pay $11.7 billion for UST. The purchase values UST at $69.50 a share, 29 percent more than its price before the New York Times reported Thursday that Altria would bid for the company.

Altria shares closed yesterday at $20.97 a share, up 2 cents.

"Altria is buying two tremendous brands in Skoal and Copenhagen, which it can drop quite profitably into its own distribution network," said Thomas Russo, who manages more than $3 billion at Gardner Russo & Gardner, which owns 6 million Altria shares and 3.3 million UST shares.

Altria is also gaining UST's Ste. Michelle Wine Estates unit, which it may sell. Wine contributed 18 percent of UST's $1.89 billion in revenue last year.

"It's a great business," Szymanczyk told analysts. "We'd like to understand it a bit better, and ultimately we'll make some decisions about how to get the best value out of it for shareholders."

Company officials did not release specifics about how UST would be integrated into Altria's existing businesses. Altria spokesman David Sylvia said it was too early to comment on how the deal might affect its Richmond-area operations.

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UST has manufacturing facilities in Nashville, Tenn., Franklin Park, Ill. and Hopkinsville, Ky. "As of right now, the plan is that those facilities will continue in operation," Sylvia said. He said no decision has been made about UST's corporate office in Stamford, Conn.

Altria said it is expecting to save about $250 million in costs by 2011 by reducing administrative and other expenses through combining some operations.

The announcement of the acquisition was not a surprise in the industry, said Lennart Freeman, president and chief executive officer of Swedish Match North America, a cigar and smokeless tobacco company.

Swedish Match, maker of the Longhorn and Timberwolf brand of moist snuff, employs about 125 workers at its North American headquarters in Chesterfield County.

"UST is an established player in the U.S. market and we also expect Altria will be an aggressive competitor," Freeman said.

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Szymanczyk said Altria's ongoing test marketing of two smokeless tobacco products under the Marlboro brand name would continue. "We think it has a place in the smokeless area, and we are going to be working to take advantage of that," he said.

Both UST and Altria are backing legislation that would give the U.S. Food and Drug Administration authority to regulate tobacco products. But the merger of cigarette and smokeless tobacco companies raises some public-health concerns, said Gregory Connolly, a public health professor at Harvard University and tobacco-control activist.

"I think there is very strong concern that both Philip Morris and R.J. Reynolds are doing this to promote dual use of cigarettes and smokeless tobacco," as indoor smoking bans stop more smokers from lighting up, said Connolly, a dentist. About 30,000 Americans are diagnosed with oral cancer every year, and about 10,000 die from it, he said.

About UST Inc.

The nation's largest smokeless tobacco company will become a subsidiary of Altria Group Inc.

Headquarters: Stamford, Conn.

Primary business: Smokeless tobacco

Brands: Skoal, Copenhagen, Red Seal, Rooster, Husky

Employees: 4,600

Revenue: $1.93 billion (2007)

Other businesses: Ste. Michelle Wine Estates, which produces and distributes premium wines

Top Executive: Murray S. Kessler, chairman and chief executive officer (will become vice chairman of Altria after the acquisition)


Altria Group Inc.

The company said yesterday it has agreed to buy UST Inc. for $10.4 billion

Headquarters: Henrico County

Primary business: cigarettes

Businesses owned: cigarette-maker Philip Morris USA; Philip Morris Capital Corp; cigar-maker John Middleton Inc., and a 28.5 percent interest in beer brewer SABMiller Plc.

Top executive: Michael E, Szymanczyk, chairman and chief executive officer

Employees: 5,600 (Richmond area)

Revenue: $9.5 billion (first half of 2008)

SOURCE: Altria Group

Contact John Reid Blackwell at (804) 775-8123 or [email protected]

Bloomberg News contributed to this report.

MEMO: BREAKING NEWS 9/08/2008 7:40 AM on

Originally published by REID BLACKWELL; Times-Dispatch Staff Writer.

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