ust memo

that the primary business risks associated with UST Inc. include but are not limited to: litigation, poor diversification of product lines, resignation of two key executives, lack of innovation and timeliness of new products, and erosion of market share due to competitors. Aside from the risks, UST has several key attributes that set them apart from other companies. UST continues to be a top company relative to the smokeless tobacco industry and other industries in terms of profitability and has significantly less pending lawsuits against them compared to other tobacco companies. UST is the dominant producer of smokeless tobacco holding 77% of the smokeless tobacco market and also has very strong brand recognition. In terms of the bondholders, UST has a historically high dividend payout rate.
There are a few reasons as to why UST is considering a leveraged recapitalization. If the leveraged recapitalization is implemented, the value of the company would increase because of the interest tax shield of $380 million. The tax shield will increase the free cash flows of the company, supplying UST with more capital to invest in new product lines and marketing and promotion strategies to combat the erosion of market share by competitors. This would also reduce the company’s agency costs because of the obvious internal conflicts within the company causing two top executives to resign. With the recapitalization, the ownership is concentrated to better monitor the managers from not having the shareholders’ or bondholders’ best interests in mind. This strategy of recapitalization gives the company less cash to waste on projects that are not beneficial to the company and holds managers to be more accountable.
In the analysis of UST’s financials, it is safe to assume UST has a AA long-term issue credit rating showing the company’s capacity to meet its financial commitment on the debt obligation is very strong. UST’s EBIT interest coverage is higher than the Industrial