Ust Inc. Debt Policy, case study, case analysis, smokeless tobacco company, tobacco products, price-value market share, price-value competitor, tobacco industry, leveraged recapitalization
UST Inc. is the dominating smokeless tobacco company in the market with over 75% of market share and 90% of sales coming from their tobacco products. Their declining market share poses a problem for the company. As a premium and leading brand, the company ignored lower priced competitors.
After losing 9% of their market share to price-value brands/competitors, they launched their own price-value brand named "Red Seal". This move was too late as they addressed the problem as insignificant early on. With declining market share, and pending litigations, health movements/reforms against tobacco, these aspects may negatively impact future cash flows and estimates. Even though smokeless tobacco is a much healthier alternative to cigarettes and has fewer litigation cases, UST Inc. has put most of its eggs in one basket by having over 90% of their sales come from their smokeless tobacco line.
[...] Some recommendations for the company are to; Use the debt for the repurchase of shares, focus on their price-value brand and try to take back market share from the price-value market share, or acquire their largest price-value competitor using shares and equity. The Company The U.S smokeless tobacco industry generated billion in revenue in 1998. Smokeless tobacco is the fastest growing segment of the tobacco industry with a annual growth rate year over year compared to the decline year over year in cigarettes. Tobacco has an inelastic pricing market, there is always a high demand for tobacco and tobacco products. In this industry, UST Inc. (the company) is the leading producer of moist smokeless tobacco, with over 75% of market share. [...]
[...] while all other competitors gaining market share in figure 5 below. Figure 5 The company is not in good position to expand internationally due to smokeless tobacco and tobacco (in general) not being of popular use overseas. Recapitalization UST Inc. considering leveraged recapitalization after a long history of conservative debt policy can be attributed to using debt to increase interest tax shield, fund discounts and rebates to retain or gain market share, reduce capital costs, buy back shares, increase share value, and fight or defend against hostile takeovers. [...]
[...] (Ranked from most effective to least effective) Status Quo - Use the debt to buy back shares Focus on their price-value brand and regain market share loss due to competitors Acquire their largest price-value competitor Using the debt to buy back shares deemed to be a value creating project. The change of debt policy should not hamper dividends or hurt the company (as shown in the analysis in the prior pages). The creation of a tax shield and share buyback is a great strategy to further grow the value of the company and increase shareholder wealth. Another recommendation is to focus on their price-value brand to regain market share that was lost to competitors. This project may be put into its strategic goals after the share buyback. [...]
[...] The company is able to cover both interest payments and all dividend payments with the change in debt policy. In figure 9 below, we created a pro forma to analyze what would happen to the dividend payout and payout ratios with the different levels of debt expense for 1999. Figure 9 The more likely debt rate is as the company is AA rated. The probability tables below shows the probability of default given the company's current rating through the years. [...]
[...] We can see net sales and profit increasing year over year. Figure 1 The company generates over 85% of sales from tobacco which can show an undiversifiable risk in their market. The weight of the company lies in the hands of the tobacco industry. In figure 2 below, we can see profits of over 95% in the tobacco section of their company. Figure 2 According to the Standard & Poor's corporate ratings in figure 3 on the next page, UST Inc. [...]
using our reader.