Altria to buy UST for $10.4 billion

CHICAGO Mon Sep 8, 2008 12:57pm EDT

A cigarette lies in ashtray in front of a pub in Bensheim early July 30, 2008. REUTERS/Alex Grimm

A cigarette lies in ashtray in front of a pub in Bensheim early July 30, 2008.

Credit: Reuters/Alex Grimm

CHICAGO (Reuters) - Altria Group Inc (MO.N) has agreed to buy UST Inc UST.N, the largest U.S. smokeless tobacco maker, for $10.4 billion in a deal that will combine the Marlboro cigarette and Skoal moist snuff brands.

Altria said on Monday it will pay $69.50 a share in cash and assume about $1.3 billion in debt to acquire UST, aiming to expand its own offerings from a shrinking U.S. cigarette market.

The price represents a 29 percent premium to UST's closing price on Thursday, the day before news of a possible deal between the sides broke in The New York Times.

That was near the top of a range expected by some analysts, raising the question whether Altria was paying too full a price for a premium smokeless tobacco business that has been losing market share to Reynolds American Inc's(RAI.N) Conwood unit, which makes the Grizzly and Kodiak smokeless brands.

"It seems to me to be a fair and full price. I don't think they are stealing UST by any stretch, but I don't think they are grossly overpaying either," said Matthew Kaufler, portfolio manager at the Touchstone Value Opportunities Fund, who has managed Altria and UST shares in the past.

UST shares were up 0.9 percent at $68.15 in early New York Stock Exchange trade. Altria shares rose 1.8 percent to $21.33.

UST, which also owns the Ste. Michelle Wine Estates, has long been seen as a likely acquisition target for Altria. Speculation over a possible deal revived in February as Altria was spinning off its international tobacco arm.

UST commands almost 58 percent of the U.S. smokeless tobacco market, as of the 26 weeks that ended June 14, according to the company's latest earnings report.

But its main business, the premium segment, has been pressured by soaring gasoline prices and the weak U.S. economy.

FEWER SHARE BUYBACKS

Altria had already sought a hold on the smokeless tobacco market by test-marketing smokeless tobacco products under the Marlboro name to counter declining U.S. cigarette sales.

U.S. cigarette consumption has fallen steadily since 1981 as more bans on smoking in public areas have been put in place and health messages against cigarettes become more prevalent and aggressive.

Cigarette makers also face marketing limitations from a 1998 tobacco litigation settlement with U.S. states. The restriction of cigarette use has also helped spur growth in the U.S. smokeless tobacco market.

Altria expects the acquisition of UST to add to adjusted diluted earnings per share within 12 months of closing, the company said in a statement.

Reduced expenses are expected to help create about $250 million in synergies from the deal by 2011, Altria said.

Altria expects to maintain a dividend payout ratio of approximately 75 percent following the deal. The combined company is expected to generate $4 billion in cash from operations.

In order to finance the deal, Altria cut its share repurchase authorization to $4 billion over the next three years from its current $7.5 billion two-year plan.

UST Chairman and Chief Executive Murray Kessler will be named vice chairman at Altria once the deal is completed.

Reports last week of Altria buying UST also fueled speculation about consolidation in the tobacco market, which helped lift shares of potential takeover target and Newport cigarette maker Lorillard Inc (LO.N) on Friday.

Altria received financing of $7.0 billion from Goldman Sachs & Co (GS.N) and J.P. Morgan (JPM.N) for the deal.

(Additional reporting by Sweta Singh in Bangalore; Editing by Maureen Bavdek, Dave Zimmerman)

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