A multibillion dollar deal crafted on Wall Street to sell UST Inc., which makes Skoal and Copenhagen smokeless tobacco, probably won't lead to the closure of the snuff maker's Nashville factory, which opened in 1936.
Richmond, Va.-based Altria Group Inc., agreed to buy UST Inc. for $10.3 billion to combine Copenhagen and Skoal snuff with its Marlboro cigarettes and vault ahead of Reynolds American Inc. as the biggest seller of smokeless tobacco.
The purchase values Stamford, Conn.-based UST at $69.50 a share, 29 percent more than its price before TheNew York Times reported Sept. 4 that Altria would bid for the maker of Skoal.
The combination boosts Altria to the role of industry leader from virtually no position in the $3.7 billion snuff market, the fastest-growing segment of the tobacco industry, Chief Executive Officer Michael Szymanczyk said.
"Altria is buying two tremendous brands in Skoal and Copenhagen, which it can drop quite profitably into its own distribution network," said Thomas Russo, who manages more than $3 billion at Gardner Russo & Gardner. The Lancaster, Pa.-based firm owns 6 million Altria shares and 3.3 million UST shares.
The agreement comes after Altria started testing Marlboro smokeless tobacco and said in March that it was considering an acquisition of a snuff maker. The purchase also includes about $1.3 billion in debt, valuing the transaction at $11.7 billion, Altria said.
Skoal and Copenhagen remain the biggest U.S. brands of snuff, finely ground tobacco that a user tucks between the lip and gum to extract nicotine and flavoring such as wintergreen. U.S. producers also sell a Swedish product called snus, which consists of tobacco in small pouches that requires less spitting and is therefore acceptable to use in more places.
Nashville has a factoryThe company's primary facility for manufacture of its moist smokeless tobacco is in Nashville, but there are two other factories, in Hopkinsville, Ky., and Franklin Park, Ill., said UST spokesman Thomas J. Fitzgerald.
He couldn't give a breakdown on employment at the Nashville plant, but Fitzgerald said there are "about 900 total workers between the Nashville and Hopkinsville" plants.
While "any decision on continuing operations is ultimately going to be made by Altria," he said, "the manufacturing of moist smokeless tobacco products is a proprietary process that involves very skilled workers, and we'd expect Altria's need for those workers to continue well beyond the conclusion of the transaction."
The deal could close by the end of the year, Fitzgerald said, though it could be delayed into next year pending regulatory approval and ratification of the deal by UST's shareholders.
Nashville's plant makes all four of UST's smokeless-tobacco brands — Copenhagen, Skoal, Red Seal and Husky, he said.
Altria spokesman David Sylvia declined to predict the future of the Nashville facility.
"Right now, it's too early to say anything," he said. "But we're obviously interested in UST because of their great brands and manufacturing capabilities. Our background is in manufacturing cigarettes and machine-made cigars."
He said Altria is expecting to achieve $250 million in annual savings by combining the two companies. He said savings will be "mostly corporate overhead expenses."
Altria does have a small smokeless-tobacco production facility in Virginia, however, which makes its Marlboro snuff, Sylvia said.
Szymanczyk, 59, said he called UST CEO Murray Kessler in May to discuss combining the companies. Altria's declining cigarette shipments and market share of brands such as Virginia Slims give it experience that can help UST with the de-creasing market share of Skoal and Copenhagen as people buy lower-priced snuff, Szymanczyk told analysts.
Szymanczyk declined to discuss how costs might be cut. He said he expects Altria to keep UST's "manufacturing set up."
U.S. cigarette consumption may drop 3.5 percent this year and fall 3 percent in subsequent years as manufacturers raise prices and states boost excise taxes, estimated Judy Hong, a Goldman analyst in New York. An increase of federal excise taxes, possible as early as 2009, would also dampen demand, she said.
American smokers are buying fewer cigarettes as smoking bans and health concerns dampen demand, other analysts said. That has forced tobacco companies to look for sales growth from alternatives. Smokeless sales are growing by about 5 percent to 6 percent a year.
Builders Doing Their Part to Help Consumers Take Advantage of Tax Credits
As domestic markets sink, companies soar overseas
Mannerisms may keep others from listening to message
