NEW YORK -- A long-anticipated deal by Altria Group Inc. to buy smokeless tobacco company UST Inc. could be reached within months, but the price remains the toughest sticking point, sources familiar with the potential deal told Reuters on Friday.
Altria has been seen for years as poised to make an acquisition in the smokeless tobacco market. "The writing is on the wall, and has been on the wall for years, that this was the inevitable combination," said one consumer investment banker, who declined to be named. "Altria has made no secret of its intentions for the smokeless market."
"[image-nocss] But Altria had a lot of steps to make before they could make a move. Of course, in that time, UST's prize smokeless business has deteriorated some," the banker told the news agency.
UST recently posted a 1.4% rise in fourth-quarter profits, but suffered a decline in market share for its core smokeless tobacco business. The Stamford, Conn., company, which makes Skoal and Copenhagen, is facing increasing competition from Reynolds American Inc. and Altria's Philip Morris USA unit.
Reynolds bought the Conwood smokeless tobacco business in 2006 and Philip Morris has been test-marketing a smokeless tobacco under the Marlboro brand. Buying UST, however, would give Altria an instant boost in that market to help diversify its revenue, analysts said.
"What's the quickest way to build share in smokeless tobacco? Just buy UST," said Morningstar analyst Gregg Warren.
Uncertainty remains, however, about how much of a premium UST's brands such as Copenhagen and Skoal can command over lower-priced competitors in the long-term, he added.
UST has been spending money on promotions to try to keep its customers from defecting to lower-priced brands by lessening the price gap between its products and competitor's brands in specific markets without actually cutting the list price, said the report.
With a market capitalization of $8.1 billion, UST would be a small acquisition for Altria, which has a market capitalization of $159.6 billion, Reuters said.
Fueling speculation Altria could be readying for a deal was the decision to announce only $20.5 billion worth of share buybacks, combined, by Altria and Philip Morris International. Analysts had said the company had the balance sheet for much greater buybacks if management chose. Altria CEO Louis Camilleri said on Wednesday the amount of the repurchases was reached to leave the companies with financial flexibility.
"I think it's very important and history has taught us that we should have flexibility and financial wherewithal to be able to respond to opportunities," he said.
Previously, Camilleri has said that much of Altria's U.S. growth will come from an "adjacency strategy," where the company focuses on noncigarette products, such as smokeless tobacco.
But Todd Sullivan of SeekingAlpha.com is skeptical. He wrote, "If Altria has had the acquisition in mind for years, why would they have spent millions developing and testing their own product? Wouldn't it just have made sense to make the purchase of UST before?"
He added, "I do not believe any delay in a potential purchase had anything to do with the recently announced PMI spin. Both Phillip Morris USA and Phillip Morris International have made acquisitions during the past few years. As a matter of fact, as recently as last fall PMUSA announced they were buying cigar maker John Middleton. Further, if UST is facing declining usage of it products (they are), then why make the move now? Altria's own smokeless products are virtually set to be rolled out nationally and based on the latest conference call, Camilleri was almost giddy over the results to date and the products potential."
Click hereto view CSP Daily News coverage of PM USA's Marlboro moist smokeless tobacco (MST).
Sullivan continued, "Assuming Camilleri is not lying, wouldn't the prudent thing to do be to wait? Let your products further erode UST's smokeless business even more and then correspondingly watch the price you have to pay for UST to decline in tandem? What if Camilleri's enthusiasm if warranted and Altria has a massive hit on its hand? They would in effect take a giant swath of business from UST and any price paid today, would look excessive down the road."
"It isn't that a potential purchase of UST would be bad for Altria (it would be great), it is that the timing of doing it now just would not seem to make a whole lot of sense. It would seem that doing it a year or so ago or a year or two from now would be a far more economically sound decision," he concluded.
Click hereto view speculation that PM USA could acquire Swedish Match rather than UST.
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