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Todd Sullivan
Todd Sullivan

It's Official, Altria Buys UST

September 09, 2008 | About:

Wow, I guess those who predicted the death of Altria (NYSE:MO) due to the decline in smokers jumped the gun just a bit?

Altria announced the purchase of UST (UST) will:

-- Creates a total tobacco platform with superior premium tobacco brands that includes Marlboro, Copenhagen, Skoal and Black & Mild

-- Accretive to adjusted diluted earnings per share within twelve months of closing

-- Generates estimated annual synergies of $250 million by 2011

-- Diversifies Altria's revenues and operating income

In the release, Altria said they:

Entered into a definitive agreement for Altria to acquire all outstanding shares of UST, the world's leading moist smokeless tobacco (MST) manufacturer. Under the terms of the agreement, shareholders of UST will receive $69.50 in cash for each share of common stock held. The transaction is valued at approximately $11.7 billion, which includes the assumption of approximately $1.3 billion of debt.

"The combination of Altria and UST creates the premier tobacco company in the United States with leading brands in cigarettes, smokeless tobacco and machine-made large cigars," said Michael E. Szymanczyk, Chairman and Chief Executive Officer of Altria. "We are excited about this strategic and financially attractive acquisition as it will enhance our ability to deliver superior shareholder return that is expected to exceed our 12% goal. This transaction is consistent with our growth strategy of making disciplined investments in adjacent categories. UST provides Altria with the leading premium brands, Copenhagen and Skoal, in the highly profitable MST category. We will also acquire Ste. Michelle Wine Estates, a premium wine business, as part of the transaction."

Upon completion of the transaction, Altria's operating companies will offer adult tobacco consumers a diverse range of superior premium tobacco products with strong brands including Marlboro, Copenhagen, Skoal and Black & Mild.

"This all cash transaction delivers compelling value to UST's shareholders," said Murray S. Kessler, Chairman and Chief Executive Officer of UST. "UST's growth strategy will clearly be enhanced by Altria's resources and infrastructure."

Based on UST's three-month average stock price of $53.90, this offer represents a premium of 28.9% to UST's shareholders.

The transaction is subject to UST shareholder approval and customary regulatory approvals, which will be pursued promptly. A copy of the agreement containing all the terms of the transaction is filed today with the U.S. Securities and Exchange Commission.

The transaction does not change Altria's 2008 guidance for adjusted full-year diluted earnings per share from continuing operations, which is expected to be in the range of $1.63 to $1.67. This range represents a 9% to 11% growth rate from an adjusted base of $1.50 per share in 2007.

Financial Benefits

Altria expects the acquisition of UST to be accretive to adjusted diluted earnings per share within twelve months of closing and to generate an attractive double-digit economic return.

The integration is anticipated to generate approximately $250 million in annual synergies by 2011, primarily driven by reduced selling, general and administrative and corporate expenses. Altria believes that these estimated synergies will enable the company to deliver increased shareholder and consumer value.

The UST acquisition is expected to grow and diversify Altria's operating income and net revenues. For the first half of 2008, reported operating income for Altria and UST was $2.6 billion and $451 million, respectively. If Altria had owned UST since the beginning of 2008, Altria's first half of 2008 net revenues would have increased 10.3% to $10.4 billion as shown in Table 1 below.

Altria generates approximately $3.5 billion of operating cash flow per year. After the acquisition Altria expects to generate over $4.0 billion of operating cash flow per year. Altria continues to be committed to returning a large majority of this cash to Altria shareholders through a combination of dividends and share repurchases. Altria anticipates maintaining a dividend payout ratio of approximately 75% post-transaction. Payments of future dividends will be at the discretion of the Altria Board of Directors.

In conjunction with the acquisition agreement, Altria has modified its share repurchase program. The Board of Directors has approved a three-year (2008 to 2010) $4.0 billion program, replacing a previously announced two-year $7.5 billion program. This modified program facilitates financing the UST acquisition. Altria spent approximately $1.2 billion repurchasing 53.5 million shares of its stock in 2008, and the company expects to resume purchasing stock against this modified program in 2009.


Altria has received new committed bridge financing totaling $7.0 billion from Goldman Sachs & Co. and J. P. Morgan which, together with its existing credit facilities and cash, is expected to be more than sufficient to fund the transaction. Altria intends to access the public-debt market to refinance a portion of its credit facilities. To help Altria achieve the highest credit ratings on such refinancings, Philip Morris USA Inc., a wholly-owned subsidiary of Altria, has issued guarantees for Altria's debt.

The beauty of it all, it is an all cash deal, not dilutive to current stockholders and UST products now become 10% of Altria revenues. EPS in 2008 grow 9% to 11% and the stock yielded, before the deal 6%.

Now, if you had invested before the deal, you'd still be getting your 6% yield and now have a company that will grow earnings 10% plus, just diversified its earnings into a growth product and dominates the markets it operates in.


About the author:

Todd Sullivan
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.8/5 (10 votes)


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