Questions
What are the attributes of UST Inc.? What are the primary business risks associated with UST Inc.?
Evaluate the risks of UST from the viewpoint of a credit analyst or potential bondholder. Rate the risks according to Exhibit 7 and 8, and explain the ratings.
Why is UST Incc. considering a leveraged recapitalization after such a long history of conservative debt policy?
Should UST Inc. undertake the recapitalization? Calculate the marginal effect on USTs value, assuming that the recapitalization is implemented in 1999.
How might the recapitalization affect stockholders in terms of share prices, dividend payments, and so on? Show the calculations.
The importance of recapitalization to UST Inc development
-from the analysis of the financial statement in 1998
DEBT POLICY AT UST Inc.
1. 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 $billion over 5 years
2. UST Background
175 year old company
Dominant producer of moist smokeless tobacco
Uninterrupted cash dividends since 1912
One of the most profitable Ameican companies
5-year ROCE of 92.1%
Increasing EPS and Share price
P/E ratio=13.8
3. SMOKELESS TOBACCO MARKET (1998)
$2 billion 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
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
5- Yr CAGR 10- Yr CAGR
Net Sales 5% 9%
EBIT 6% 11%
EPS 9% 13%
GPM 79.7% 77.3%
NPM 32.7% 31.3%
ROE 122.8% 89.1%
Div Payout