OTP Deal Viable

Analysts see potential in possible PM USA buy of USSTC; companies remain mum

Angel Abcede, Senior Editor/Tobacco, CSP

RICHMOND, Va. -- Philip Morris USA's potential purchase of U.S. Smokeless Tobacco Co. (USSTC) as a way to enter full-force into the other tobacco products (OTP) category is considered wise in the view of at least two industry observers, although representatives of the two companies remain mum.

"[Philip Morris USA] knows how to leverage the strength of a brand portfolio," Kit Dietz, owner of Dietz Consulting, Huron, Ohio, told CSP Daily News. "If you combine [USSTC's premiere brands of] Copenhagen and Skoal, they'd have a significant presence across all segments of the tobacco category."[image-nocss]

Representatives for both PM USA, Richmond, Va., and USSTC, Stamford, Conn., declined to comment on speculation that the purchase was imminent, as previously reported in CSP Daily News, but in addition to Dietz, financial analyst Nik Modi of UBS Investments Research, New York, issued a statement based on a Reuters report of the proposed deal.

"We fielded lots of calls from investors asking us what we thought [about PM USA potentially buying USSTC]. The reality is we have no idea if a deal is imminent, but we believe this combination makes strategic sense for all the obvious reasons—scale in a growing category, category know-how, strong premium brands, etc.," Modi said in the statement. "We believe the likelihood that USSTC is taken over increases as PM USA's organic entry into MST [moist smokeless tobacco] continues to struggle. Our field research continues to suggest that repeat rates for Marlboro MST are poor and the brand continues to lose traction on a same-store-sales basis."

David Sutton, a spokesperson for PM USA, said the company does not comment on what individual analysts say. Last month, the company announced the expansion of its Marlboro MST test into the greater Atlanta area. (For more on the test expansion, click here.)

Although he would not comment on speculation that PM USA is considering the purchase of the company he works for, Ed Chrupcala, director of category development for USSTC, told CSP Daily News that movement by the major cigarette manufacturers into the other-tobacco-products (OTP) segment is a sign of a healthy category. "If you look back to 2000-2001, our company made a commitment to converting adult [smoking] customers to using moist [tobacco products]," he said. "If you look at our results toward working at that vision, there's growth in the category that others have taken notice [of]."

The coming years, Chrupcala said, will be an "exciting time" as more introductions come into the segment. USSTC itself is introducing a wintergreen flavor to its Skoal brand on St. Patrick's Day this year, in homage to its green packaging.

He does admit that with change comes challenge, especially for retailers. "Growth [in the category] is rapidly expanding," he said. "More smokers are now entering moist, and we expect [category introductions] to continue. It all comes back to the big challenge of how to manage space."

[For a more in-depth look into Big Tobacco's moves into OTP, watch for the March issue of CSP magazine.]

Angel Abcede, CSP/Winsight By Angel Abcede, Senior Editor/Tobacco, CSP
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