Debt Policy at Ust

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t pFor the exclusive use of J. YE
Harvard Business School 9-200-069
Rev. May 3, 2001

Debt Policy at UST Inc.
In December 1998, UST Inc.’s board of directors approved a plan to borrow up to $1 billion over five years to accelerate its stock buyback program.1 For UST Inc., the leading producer of moist smokeless tobacco products and a company widely known for its conservative debt policy and high dividend payout (uninterrupted cash dividends since 1912), this announcement generated considerable attention on Wall Street. Investors eagerly awaited the subsequent actions of Vincent Gierer, Jr., UST’s Chairman and CEO. In 1997, UST had suspended its stock repurchase program, approved in 1996, because of legislative and legal issues confronting the tobacco industry.2 In November 1998, the company signed the Smokeless Tobacco Master Settlement Agreement resolving its potential state Medicaid liability and reinstated its repurchase program.3 Management believed that this agreement represented significant progress with respect to the legal and legislative matters confronting the company, permitting UST to proceed with its business strategy and potential recapitalization.

The Smokeless Tobacco Market
The U.S. smokeless tobacco industry generated $2 billion of retail revenue in 1998 with approximately 5 million consumers of moist smokeless tobacco and 7 million consumers of chewing tobacco including loose leaf, twist, plug and dry. Moist smokeless tobacco consumption approximated 50% of the total. See Table A on page 2 for a description of smokeless tobacco products. While decelerating recently, the USDA reported moist smokeless tobacco has been the fastest growing segment of the tobacco industry with volume increasing at a 3.7% annual growth rate over the past 17 years compared with a 2% annual decline in cigarette volume over the same period. A.C. Nielson reported that moist snuff volume grew 2.9% in 1997 and 1.2% in 1998.4 A number of factors contributed to the continued growth of the moist smokeless tobacco segment. The increased prevalence of smoking bans has led consumers to switch to smokeless

1 UST Inc. Press Release, “UST Increases First Quarter 1999 Dividend; Accelerates Stock Repurchase with $1

Billion to Be Borrowed Over 5 Years,” December 10, 1998.
2 “UST Stock Buybacks: Initiatives Planned for 1999,” Dow Jones News Service, December 10, 1998. 3 Merrill Lynch & Co., “UST Inc.,” December 4, 1998. 4

Data in this paragraph from Credit Suisse First Boston, “UST, Inc.: Still Chewing on the Story – Stay Tuned,” August 27, 1999.

Professor Mark Mitchell prepared this case from published sources with the assistance of Janet T. Mitchell as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2000 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 1 This document is authorized for use only by Jinlin Ye in Corporate Finance Econ 134 Spring 2011 taught by LISA MEULBROEK from January 2011 to July 2011.

For the exclusive use of J. YE
200-069 Debt Policy at UST Inc.

tobacco to circumvent smoking restrictions. Consumers perceive that moist smokeless tobacco is less of a health risk than cigarettes. Smokeless tobacco is less expensive to use than cigarettes based upon an average per-week usage measurement. Additionally, consumers have been shifting over time to moist smokeless tobacco from loose leaf chewing tobacco. While the consumer base remains primarily male (approximately 98%), smokeless...
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