...1) Frame the issue. Briefly describe that UST is planning to reverse a long-standing conservative financial policy. Issues: a) UST had seven pending health related lawsuits at the end of 1998. P.66 b) There’s previous uncertainty is enhanced by a lawsuit that alleged that UST had violated antitrust and advertising laws and participated in anti-competitive conduct. The industry agreed in November to settle state Medicaid lawsuits with a $206 billion settlement and bans on advertising and promotions that appeal to youth. P.66 c) UST is a dominant player of most smokeless tobacco, or most sniff, controlling approximately 77%. Also, UST expanded the category and continued to rise prices, smaller players eroded UST’s market share primarily by cutting price. However, it is not able to compete and against price-value brands. (which raised small companies concerns) price-value brands. P.64 d) The EPA report classifying environmental Tobacco smoke as a known human carcinogen. e) There is chance that hard to expand the tobacco to international market due to cultural issues tobacco 2) Evaluate the business risks of UST from the viewpoint of a credit analyst or potential bondholder. Issue a,b) UST had seven pending health related lawsuits at the end of 1998, which is uncertain about the result. It the company lost in the lawsuit, it will lost lots of money. Also, the tobacco will be push by the new law of settle state Medicaid, which prevents youth to use tobacco. Since there...
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...Debt Policy at UST, Inc. Introduction In 1998 the U.S smokeless tobacco industry generated $2 billion of retail revenue with approximately 5 million consumers of moist tobacco and 7 million consumers of chewing tobacco including loose leaf, twist, plug and dry. Moist smokeless tobacco consumption approximated 50% of the total. The factors contributing to the continuous growth of the moist smokeless tobacco was the increased prevalence of smoking bans which had led customers to switch to smokeless tobacco and the fact that smokeless tobacco was less expensive to use than cigarettes based upon an average per-week usage measurement. Additionally, consumers have been shifting over time to moist smokeless tobacco from loose leaf chewing tobacco. While the consumer base remains primarily male, smokeless tobacco is no longer confined to the stereotypical blue collar or rural users as approximately 30% of users had attended college. The overall moist smokeless tobacco market was expected to continue to grow at an annual rate of 1-3% with a larger portion of the growth expected to be in the price value segment. UST is the dominant producer of moist smokeless tobacco, or moist snuff controlling approximately 77% of the market. UST also has other business interests such as wine, cigars and international marketing of moist smokeless tobacco. UST has been a driving force in the overall expansion of the moist smokeless tobacco market over the years, primarily through product innovations...
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...Debt Policy at UST Inc.1. What are the primary business risks associated with USTInc.? What are the attributes of UST Inc.? Evaluate from theviewpoint of the bondholder. Over the years, UST has been a dominant producer in the tobaccoindustry, specifically the moist tobacco industry. Even though the paststrategy with UST has entailed raising the prices of its products on aregular basis, the company still shows signs of positive growth.Additionally, there have been recent issues with smokeless tobaccoproducts, such as lawsuits. However, there remains a constantconsumer demand for UST products. When evaluating the businessrisk of a company, one of the primary drivers of its business risk stemsfrom the price elasticity of its products. Thus, these are a few reasonsthat illustrate that the smokeless tobacco industry (UST’s mostdominant EBIT contributor) has a relatively steep demand curve andshould be considered as having an inelastic consumer demand. Also, itis important to note that UST has products outside of its coreoperations in the wine and premium cigar market. Also, UST hasintroduced products in the price value market as consumer demandhas increased. Brand name and market position - superior Cash flow generating capacity - superior Cyclicality of revenues - superior Product diversification - poor Geographic diversification - good Asset tangibility - good Litigation Risk – poorObviously, the two most troubling business risks associated with USTare its litigation...
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...Case 1 – Debt Policy at UST Inc. 1) UST is the dominant producer of moist smokeless tobacco, or moist snuff, controlling approximately 77% of the market. UST has been one of the most profitable companies in corporate America with low debt compared to other companies in the tobacco industry and the company has been recognized by Forbes in terms of profitability by achieving return of capital of 92.1%. Price elasticity of its products is also important while evaluating. Smokeless tobacco industry has a relatively steep demand curve and should be considered as having an inelastic consumer demand. UST has products outside of its core operations in the wine and premium cigar market also. The company built itself strong brand name recognition over the years by providing premium products. Tobacco industry does not allow new competitors to enter the market due to strict legal regulations and advertisement bans. So, we can think that UST will hold its position in the market in the long run. Although for the past couple of years, UST faced market share erosion due to price-value brands which offer low priced products. UST have been criticized for lacking innovation and new product offering. The company also has lack of international (geographical) diversity. Also, there is a chance of a cultural shift against tobacco, and UST is unlikely to expand to international market We can say that; UST is in a good position in terms of brand name and market position, capability to generate...
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...Case Study: Debt Policy at UST Inc. UST Inc. is the leading producer of moist smokeless tobacco products which manage by using the conservative debt policy and high dividend payout. Since the firm has faced the decline of the growth from year 1993, the company decided to make the recapitalization by borrowing $1 billion to repurchase their stock in order to maximize the company’s value. By borrowing, interest charged on loan is tax-deductible which the firm can benefit from tax shield and can also reduce the cost of capital. With the combination of debt and equity financing, the company can find the optimal point that reflect the lowest cost of capital which would provide the maximum valuation. Moreover, additional debt can reduce the agency cost of the company by forcing management to avoid investment in the underperform business. This can reflect the return on equity to increase which can represent the management performance and preferable for the investor. However, when the borrowing is too high, the risk of bankruptcy will be high also. Thus, it is important to include the risk of bankruptcy in the analysis of the firm. In order to make the decision about the borrowing plan of amount, cost and time, the information of the company, stakeholders and risk are needed to concern for analysis. From, the historical data and information, the company’s operation reflects the strong cash flow because of the strength and highly cash generative nature of tobacco...
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...1.) Business risk: • Diversification into non-‐core businesses such as video and television programming and pen and pencils may create difficulties to manage the group in a united and control manner. These diversification strategies may also signal the fact that managers are indeed exploiting their cash freedom in UST Inc with rent-‐seeking intentions such as empire building or simply out of their own interest • UST Inc has not realized strong sales in the foreign markets while competitors are already doing so in the lights of a declining domestic market. • Federal government would attempt to pay for the proposed health care reform by dramatically increasing the excise tax on smokeless Tabaco. Financial risks: • The unusually low amount of leverage (0%) might signal the fact that management does not want to have any debt constraints that could mitigate their rent-‐seeking behavior. ...
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...UST Inc. is considering a debt-for-equity recapitalization. In the deal, UST will issue $1 billion debt to buy back stocks. In class we argue that an important determinant of a firm’s debt policy is the tradeoff between the tax benefits of debt and the costs of financial distress and bankruptcy. Mature firms generating positive and stable operating income are more likely to take advantage of the debt tax shields and less likely to verge on bankruptcy, and thus may consider using more debt in their capital structure. Do you think UST Inc. would benefit from this transaction? Between 1988 to 1998, UST has enjoyed excellent financial performance. The firm has posted continuous increase in sales, earnings and cash over the entire period with a 10 year compound growth rates of 9%, 11% and 12% respectively. Most noticeably, the firm has also maintained margins with average gross profit, EBITDA, EBIT and nets margins of 77%, 53%, 50% and 31% respectively. Judging from the financial performance of UST (stable positive earnings), we can firmly conclude that the UST is an assets-in-place firm. The purpose of the debt-for-equity recapitalization is for UST to enhance their overall firm value. 1. First, UST will benefit from the interest tax shield. a. Tax Shield = Corporate Tax Rate * Debt = 0.38 * 1 billion = $0.38 billion In addition, the recapitalization will decrease the number of outstanding shares and as such generate higher returns for shareholders. Moreover, servicing...
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...Browse Essays 1. What are the primary business risks associated with UST Inc.? What are the attributes of UST Inc.? Evaluate from the viewpoint of a bondholder. (Your answer should be more qualitative than quantitative!) The following factors weave into the risks and attributes of the company from the creditors’ point of view: A. UST had seven pending health related lawsuits at the end of 1998. The outcomes of these suits are uncertain. Despite the major Medicaid state settlements, lawmakers are expected to continue to push for new laws to combat youth tobacco use. Other litigation against tobacco companies is expected to continue, especially suits filed by individuals. This uncertain litigation and legislative environment makes the future cash flows of UST risky B. UST is a dominant player and market leader and its strategy is to combat entrants by launching similar products, rather than cutting prices. But the recent market erosion by small companies has raised concerns. And UST’s “counter attack” has not been effective in competing against price-value brands. The resignation of his CFO and President of tobacco unit further raise the uncertainty of the company’s efficiency of solving the market erosion problem. C. The previous uncertainty is enhanced by a lawsuit that alleged that UST had violated antitrust and advertising laws and participated in anti-competitive conduct. Should UST lost the suite, it will be more vulnerable...
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...EXECUTIVE SUMMARY UST Inc. is a principal producer of moist smokeless tobacco products, controlling roughly 77% of the overall market, and widely known for its conservative debt policy and high dividend payout. UST also has an exceptional financial performance as net sales has been growing at 11% compounded annual growth rate, and cash flows have been growing at 12% compounded annual growth rate for the past 10 years. However, UST’s board of directors approved a plan to borrow up to $1 billion over five years to accelerate its stock buyback program in December 1998. Although this debt policy benefited UST in term of additional tax shield and rise in stock market price, however, the debt would directly increase financial distress and weaken UST’s cash flow. This report is prepared to consider debt policy for assessing a leverage recapitalization for UST and evaluate effect of dividend payment from buyback policy. After carefully evaluation of available information and using finance literature and relevant course lectures to conduct financial methodologies, including Unlevered beta, Value of levered firm with Financial Distress, Weighted Average Cost of Capital Analysis for Capital Structure Choice, and Proforma, I recommend UST to implement its one billion dollars buyback program in a period of five years. OVERVIEW OF UST Over the years, UST has been named the most profitable company in America in 1998 by Dreman Asset Management as measured by return on equity, return on...
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...Debt Policy at UST Inc. Executive Summary In the 1990’s, UST was a dominant producer of moist smokeless tobacco, controlling 77% of the market. Smokeless tobacco products consist of snuff (dry and moist) and chewing tobacco (loose leaf, plug and twist/roll) categories. UST was a market leader of the snuff product category, innovating with new product forms and flavors over the years. UST has also been a profitable company, boosting its shareholders’ earnings by undertaking measures such as increasing the cost of its products steadily with time. UST also benefited from the steady increase in market demand for smokeless tobacco given the rising restrictions on cigarette second hand smoke. UST was still criticized at the time for its tardiness with new product introductions and losing its market share to new and smaller competitors. In 1997, instead of cutting product prices to compete, UST introduced new line of lower priced products such as Copenhagen Long Cut and Rooster. UST also renewed its focus on the marketing campaigns, launching promotions and increasing couponing. For years, tobacco industry had been embattled with health related lawsuits. Majority of these litigations were for cigarette companies in comparison to smokeless tobacco industry. Still, UST had seven pending health related lawsuits. UST has historically been one of the most profitable companies in corporate America. Even though S&P rated the debt of many tobacco companies as investment grade...
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...Debt Policy at UST Inc. Executive Summary In the 1990’s, UST was a dominant producer of moist smokeless tobacco, controlling 77% of the market. Smokeless tobacco products consist of snuff (dry and moist) and chewing tobacco (loose leaf, plug and twist/roll) categories. UST was a market leader of the snuff product category, innovating with new product forms and flavors over the years. UST has also been a profitable company, boosting its shareholders’ earnings by undertaking measures such as increasing the cost of its products steadily with time. UST also benefited from the steady increase in market demand for smokeless tobacco given the rising restrictions on cigarette second hand smoke. UST was still criticized at the time for its tardiness with new product introductions and losing its market share to new and smaller competitors. In 1997, instead of cutting product prices to compete, UST introduced new line of lower priced products such as Copenhagen Long Cut and Rooster. UST also renewed its focus on the marketing campaigns, launching promotions and increasing couponing. For years, tobacco industry had been embattled with health related lawsuits. Majority of these litigations were for cigarette companies in comparison to smokeless tobacco industry. Still, UST had seven pending health related lawsuits. UST has historically been one of the most profitable companies in corporate America. Even though S&P rated the debt of many tobacco companies as investment grade...
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...Harvard Business School 9-200-069 Rev. May 3, 2001 Debt Policy at UST Inc. In December 1998, UST Inc.’s board of directors approved a plan to borrow up to $1 billion over five years to accelerate its stock buyback program.1 For UST Inc., the leading producer of moist smokeless tobacco products and a company widely known for its conservative debt policy and high dividend payout (uninterrupted cash dividends since 1912), this announcement generated considerable attention on Wall Street. Investors eagerly awaited the subsequent actions of Vincent Gierer, Jr., UST’s Chairman and CEO. In 1997, UST had suspended its stock repurchase program, approved in 1996, because of legislative and legal issues confronting the tobacco industry.2 In November 1998, the company signed the Smokeless Tobacco Master Settlement Agreement resolving its potential state Medicaid liability and reinstated its repurchase program.3 Management believed that this agreement represented significant progress with respect to the legal and legislative matters confronting the company, permitting UST to proceed with its business strategy and potential recapitalization. The Smokeless Tobacco Market The U.S. smokeless tobacco industry generated $2 billion of retail revenue in 1998 with approximately 5 million consumers of moist smokeless tobacco and 7 million consumers of chewing tobacco including loose leaf, twist, plug and dry. Moist smokeless tobacco consumption approximated 50% of the total...
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...Debt Policy at UST Case Questions Group members: Wei-Ting Liao; Cong Ren; Gerald Nyiti; Beidan Wang 1- ) Give a brief summary of the company background UST Inc. is a smokeless tobacco company which enjoyed a long tradition and a recognizable brand name. It is the leading producer of moist smokeless tobacco products and widely known for its conservative debt policy and uninterrupted cash dividend payout since 1912. The company is the major player in U.S. smokeless tobacco market. For example, it holds the maximum market share (77%) as a whole, and dominates especially in the growing segment of moist smokeless tobacco. Additionally, it has widely recognized brand and competitive positon in the market by constant innovation and new product innovation. Finally, UST has historically been one of the most profitable companies not only in the smokeless tobacco market but also in the corporate America. Although the above advantages, UST now faces with continuous threat from price-value competitors, a softening smokeless tobacco market, investors’ concern about over-investment on non-core operations and negative effect of public and political sentiment towards the tobacco industry. 2- ) Evaluate UST’s attributes/Risks from view point of bondholder The following factors weave into the risks and attributes of the company from the creditors’ point of view (“” and “” represents advantage and disadvantage, respectively): Widely recognizable brand Name UST has widely recognized...
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...Policy at UST Inc. Group #10 What are the attributes and primary business risks associated with UST, from viewpoint of a potential creditor (bondholder). Generally, UST is one of the most profitable companies in America. It is also the first and leading producer of smokeless tobacco. However, it still meet some risk. First of all, UST has seven current health related lawsuits. Secondly, UST didn’t has value opportunity to expand in international market. Finally, UST didn’t have an effective way to deal with the continued threat of price-value competitors. Rate the overall business risk In 1999, Debt Ratio = Total Liabilities/ Total asset=100/913.3= 10.95% D/E Ratio= Total liabilities/ Shareholders’ Equity= 100/ 468.3= 21.35% Why are they considering a leveraged recap after a long history of conservative debt policy UST wants to reduce the taxes paid and increase the firm value by leveraged recapitalization. Recapitalization can make capital structure of UST more stable, and sometimes to boost the company's stock price. Evaluate their past financial performance During 10 years, UST kept a good financial situation, which show a positive signal for shareholders an investors. This company was one of the most profitable companies because of good ROE, ROA and gross profit margin. Except decrease in earnings and cash flow in 1997, UST kept increasing in sales (10-year compound annual growth rate of 9%), Net income (11%) and Free operating cash flow (12%). UST also kept...
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...Harvard Business School 9-200-069 Rev. May 3, 2001 Debt Policy at UST Inc. In December 1998, UST Inc.’s board of directors approved a plan to borrow up to $1 billion over five years to accelerate its stock buyback program.1 For UST Inc., the leading producer of moist smokeless tobacco products and a company widely known for its conservative debt policy and high dividend payout (uninterrupted cash dividends since 1912), this announcement generated considerable attention on Wall Street. Investors eagerly awaited the subsequent actions of Vincent Gierer, Jr., UST’s Chairman and CEO. In 1997, UST had suspended its stock repurchase program, approved in 1996, because of legislative and legal issues confronting the tobacco industry.2 In November 1998, the company signed the Smokeless Tobacco Master Settlement Agreement resolving its potential state Medicaid liability and reinstated its repurchase program.3 Management believed that this agreement represented significant progress with respect to the legal and legislative matters confronting the company, permitting UST to proceed with its business strategy and potential recapitalization. The Smokeless Tobacco Market The U.S. smokeless tobacco industry generated $2 billion of retail revenue in 1998 with approximately 5 million consumers of moist smokeless tobacco and 7 million consumers of chewing tobacco including loose leaf, twist, plug and dry. Moist smokeless tobacco consumption approximated 50% of the total...
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