debt policy at ust inc
TRANSCRIPT
DEBT POLICY AT DEBT POLICY AT UST Inc.UST Inc.
B.B.ChakrabartiB.B.Chakrabarti
IIMCIIMC
THE ISSUETHE ISSUE
UST planning a major change in capital UST planning a major change in capital structure via a debt-financed stock structure via a debt-financed stock
repurchase programrepurchase program
Dec 98Dec 98
UST Board approved a plan to borrow $1 UST Board approved a plan to borrow $1 billion over 5 yearsbillion over 5 years
UST - BACKGROUNDUST - BACKGROUND
175 year old company175 year old company Dominant producer of moist smokeless tobaccoDominant producer of moist smokeless tobacco Uninterrupted cash dividends since 1912Uninterrupted cash dividends since 1912 One of the most profitable American companiesOne of the most profitable American companies 5-year ROCE of 92.1% 5-year ROCE of 92.1% Increasing EPS and Share priceIncreasing EPS and Share price P/E ratio = 13.8P/E ratio = 13.8
SMOKELESS TOBACCO SMOKELESS TOBACCO MARKET (1998)MARKET (1998)
$2 bn in retail revenue$2 bn in retail revenue 5 mn consumers of moist smokeless 5 mn consumers of moist smokeless
tobaccotobacco 7 mn consumers of chewing tobacco7 mn consumers of chewing tobacco Moist smokeless tobacco fastest growing Moist smokeless tobacco fastest growing
segment at 3.7% annual growth over past segment at 3.7% annual growth over past 17 years against 2% annual decline in 17 years against 2% annual decline in cigarettescigarettes
UST and COMPETITIONUST and COMPETITION
USTUST Ph. Morris Median-ex Ph. Morris Median-ex USTUST
GPMGPM 80.1 80.1 41.7 41.7 28.0 28.0
NPMNPM 32.9 32.9 10.3 10.3 2.7 2.7
ROEROE 103.4 49.3 103.4 49.3 22.5 22.5
ROAROA 53.8 13.2 53.8 13.2 3.1 3.1
Debt/ Mkt Eq.Debt/ Mkt Eq. 1.5 10.1 1.5 10.1 49.8 49.8
EBITDA Int. Cov.EBITDA Int. Cov. 105.6 12.7 4.1 105.6 12.7 4.1
Debt Rating ADebt Rating A
LITIGATION and LEGISLATIVE LITIGATION and LEGISLATIVE ENVIRONMENTENVIRONMENT
Litigation and legislation are everyday Litigation and legislation are everyday occurrencesoccurrences
7 pending health related lawsuits (98)7 pending health related lawsuits (98) UST to pay $100 - $200 mn over 10 years UST to pay $100 - $200 mn over 10 years
as part of Smokeless Tobacco Master as part of Smokeless Tobacco Master Settlement Agreement to settle Medicaid Settlement Agreement to settle Medicaid disputes (Nov 98)disputes (Nov 98)
Lawmakers to continue to push new laws Lawmakers to continue to push new laws against tobacco useagainst tobacco use
UST – FINANCIAL RESULTSUST – FINANCIAL RESULTS
5-Yr CAGR5-Yr CAGR 10-Yr CAGR10-Yr CAGRNet SalesNet Sales 5%5% 9%9%EBITEBIT 6%6% 11%11%EPSEPS 9%9% 13%13%GPMGPM 79.7%79.7% 77.3%77.3%NPMNPM 32.7%32.7% 31.3%31.3%ROEROE 122.8%122.8% 89.1%89.1%Div PayoutDiv Payout 61.6%61.6% 51.4%51.4%
WALL STREET OUTLOOKWALL STREET OUTLOOK
In late 98, analysts maintain In late 98, analysts maintain neutral neutral rating on UST.rating on UST.
ReasonsReasons- Continued threat of price-value competitorsContinued threat of price-value competitors
- Softening smokeless tobacco marketSoftening smokeless tobacco market- No international expansionNo international expansion
- Lackluster performance of non-core operationsLackluster performance of non-core operations- Public and political sentiment against tobaccoPublic and political sentiment against tobacco
UST – ATTRIBUTES and RISKSUST – ATTRIBUTES and RISKSVIEWPOINT OF BONDHOLDERVIEWPOINT OF BONDHOLDER
Brand Name and Market PositionBrand Name and Market Position
- Dominant Producer with 77% market share- Dominant Producer with 77% market share- Largely insulated from competition due to Largely insulated from competition due to
advertising restrictionsadvertising restrictions
Cash Flow GenerationCash Flow Generation- Cash cow Cash cow
- Expected to continue generating strong cash Expected to continue generating strong cash flows for a long timeflows for a long time
UST – ATTRIBUTES and RISKSUST – ATTRIBUTES and RISKSVIEWPOINT OF BONDHOLDERVIEWPOINT OF BONDHOLDER
CyclicalityCyclicality- Small $ purchasesSmall $ purchases
- Relatively inelastic demandRelatively inelastic demand- UST able to raise prices in excess of UST able to raise prices in excess of
inflationinflation
Geographical DiversificationGeographical Diversification
- Minimal sales outside of US- Minimal sales outside of US
UST – ATTRIBUTES and RISKSUST – ATTRIBUTES and RISKSVIEWPOINT OF BONDHOLDERVIEWPOINT OF BONDHOLDER
Product DiversificationProduct Diversification- Very high single product risk (smokeless Very high single product risk (smokeless
tobacco)tobacco)Asset TangibilityAsset Tangibility
- Few tangible assetsFew tangible assetsLitigationLitigation
- ModerateModerate- Low relative to cigarette manufacturersLow relative to cigarette manufacturers
KEY FINANCIAL RATIOS FOR KEY FINANCIAL RATIOS FOR DEBT RATINGSDEBT RATINGS
AAA AAAA A A BBBA BBB
EBIT Interest CoverageEBIT Interest Coverage 12.9 9.2 4.112.9 9.2 4.1
Return on CapitalReturn on Capital 30.630.6 25.1 15.4 25.1 15.4
Long-term Debt/Capital 21.4 29.3 40.8Long-term Debt/Capital 21.4 29.3 40.8
S & P Industrial Senior Debt S & P Industrial Senior Debt Ratings Distribution - 1999Ratings Distribution - 1999
AAAAAA 1%1%AAAA 4%4%AA 13%13%BBBBBB 20%20%BBBB 24%24%BB 32%32%CCCCCC 4%4%DD 2%2%
UST – INCOME STATEMENT UST – INCOME STATEMENT PROJECTIONPROJECTION
Actual 98Actual 98 Pro-forma 99 Pro-forma 99SalesSales 1423.21423.2 1494.2 5% growth1494.2 5% growthEBITEBIT 753.3753.3 791.9791.9 53% of sales 53% of salesInterestInterest -2.2-2.2 0.00.0PBTPBT 755.5755.5 791.9791.9TaxesTaxes 287.6 287.6 300.9 300.9 38% 38%Net IncomeNet Income 467.9 467.9 491.0491.0Net debtNet debt 0.00.0 0.00.0Int. RateInt. RateInt. CoverInt. CoverDebt ratingDebt rating
UST – INCOME STATEMENT UST – INCOME STATEMENT PROJECTIONPROJECTION
Pro-for. 99Pro-for. 99 Pro-for. 99 Pro-for. 99 Pro-for. 99 Pro-for. 99SalesSales 1494.2 1494.2 1494.2 1494.2 1494.2 1494.2EBITEBIT 791.9791.9 791.9791.9 791.9 791.9InterestInterest 64.764.7 67.667.6 78.278.2PBTPBT 727.2727.2 724.3724.3 713.7713.7TaxesTaxes 276.3276.3 275.2275.2 271.2271.2Net IncomeNet Income 450.9450.9 449.1449.1 442.5442.5Net debtNet debt 1000.01000.0 1000.01000.0 1000.01000.0Int. RateInt. Rate 6.47%6.47% 6.76%6.76% 7.82%7.82%Int. CoverInt. Cover 12.212.2 11.711.7 10.110.1Debt ratingDebt rating AAAAAA AAAA BBBBBB
UST - VALUATIONUST - VALUATION
Status Quo $1 bn Status Quo $1 bn RecapRecap
PV Tax ShieldsPV Tax Shields 380 380Value of USTValue of UST 6,469 6,469 6,849 6,849Net DebtNet Debt 0 0 1,000 1,000Stock PriceStock Price 34.875 34.875 36.924 36.924Shares RepurchasedShares Repurchased 27.08 27.08SharesShares 185.5 185.5 158.4 158.4Market EquityMarket Equity 6469 6469 5849 5849Debt/Market EquityDebt/Market Equity 0.00 0.00 0.17 0.17
IMPACT OF RECAPITALIZATION IMPACT OF RECAPITALIZATION ON DIVIDENDS ON DIVIDENDS
Actual 98Actual 98 Pro-for. 99 Pro-for. 99 Pro-for. Pro-for. 9999
Net IncomeNet Income 467.9467.9 491.0491.0 442.5 442.5SharesShares 185.5185.5 185.5185.5 158.4 158.4EPSEPS 2.522.52 2.652.65 2.79 2.79Div PayoutDiv Payout 301.1301.1 314.2314.2 283.2 283.2Div per ShareDiv per Share 1.621.62 1.691.69 1.79 1.79
Net debtNet debt 0.00.0 1000.01000.0Int. RateInt. Rate 7.82%7.82%Debt ratingDebt rating BBBBBB
Assumed: UST continues to pay 64% of earnings as Assumed: UST continues to pay 64% of earnings as dividendsdividends
UST – REPURCHASE PROGRAM UST – REPURCHASE PROGRAM OVERVIEW OVERVIEW
19991999- Raised $240 mn in 10-yr debt (rated A+)- Raised $240 mn in 10-yr debt (rated A+)
- Repurchased 16.1 mn Shares for $466 mn at Repurchased 16.1 mn Shares for $466 mn at avg. price of $28.94avg. price of $28.94
- Dividend - $1.76 per shareDividend - $1.76 per share20002000
- Raised $300 mn in 5-yr debt (rated A+)Raised $300 mn in 5-yr debt (rated A+)- Repurchased 4.7 mn Shares for $97 mnRepurchased 4.7 mn Shares for $97 mn
- Repurchase program suspended due to $1.05 Repurchase program suspended due to $1.05 bn award against UST for violation of antitrust bn award against UST for violation of antitrust
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