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Altria agrees to buy smokeless tobacco maker UST

September 09, 2008|From the Associated Press

NEW YORK — Altria Group Inc., the U.S. leader in cigarettes, wants to be No. 1 in smokeless products too.

The owner of the nation's biggest cigarette seller said Monday that it would buy UST Inc., the maker of Skoal and Copenhagen, in a $10.4-billion deal that is part of the wider consolidation of the global tobacco industry.

Observers say Lorillard, which was spun off from Loews Corp. in June, could be next on the list of potential targets.

"It's going to put pressure on everybody else to consolidate," said Sachin Shah, an analyst at ICap Equities. Shah said Vector Group Ltd. and tobacco leaf producer Universal Corp. could also be potential targets.

Altria owns the Marlboro brand and the nation's biggest cigarette maker, Philip Morris USA. It has been test marketing Marlboro brand smokeless products, but analysts say the results have been disappointing. Its acquisition of UST would give it a strong position in smokeless tobacco, a segment of the U.S. market that is growing as cigarettes decline.

American smokers are buying fewer cigarettes as smoking bans and health concerns damp demand by 3% to 4% a year. That has forced tobacco companies to look for sales growth from alternatives such as cigars, chewing tobacco and snus, tea bag-like pouches that are popular in parts of Europe. Smokeless sales are growing by about 5% to 6% a year.

Expanding its presence in the smokeless part of the market has become more urgent for Philip Morris USA after its parent spun off its bigger-earning overseas counterpart, Philip Morris International, in March.

Altria Chief Executive Michael Szymanczyk said Monday that Altria began seriously thinking about a UST deal after the spinoff, and he called UST CEO Murray Kessler at the end of May to revive discussions that they'd been having on and off.

Szymanczyk also said the company would continue to pursue growth of Marlboro brand smokeless products.

Under the deal, Richmond, Va.-based Altria would buy Stamford, Conn.-based UST for $69.50 a share in cash, a 3% premium to UST's closing price Friday of $67.55. That comes on top of a 25% rise in UST's shares Friday as the market anticipated a deal. UST shares rose $1.35, or 2%, to $68.90 on Monday, while Altria rose 2 cents to $20.97.

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