Ust Inc. Case

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Corporate Finance Xudong Huang Homework Assignment No.1 Xi Huang
Oct 23, 2012Vasudha Nukala
Ji Qi

Executive Summary

UST Inc. has historically been one of the most profitable companies. Profitability stems from its commanding market share, strong name brand recognition, historical pricing flexibility, and growing smokeless tobacco demand. However, UST faces business risks including eroding market share, tobacco lawsuits, and reduction in innovation. UST Inc. is considering a leveraged recapitalization to help in shielding the tax, increasing the share price and eliminating idle cash and debt capacity to give the company more opportunities to expand its market share. After considering the effect of leveraged recapitalization on free cash flow, financial flexibility and dividend policy, it is suggested that UTC should undertake the $1 billion recapitalization.

Business and Risks:

UST has historically been one of the most profitable companies, with a gross profit margin of 80% compared to a median of 28% for tobacco companies shown in Exhibit 5. UST observed its operating profit of 96.8% from tobacco and 3% from wine in 1998. With the fast growing of smokeless tobacco segment and less exposure to health related lawsuits, UST’s 77% market share of smokeless tobacco market generates large profit for the company. Other attributes including premium product, strong name brand recognition, historical pricing flexibility, and limited market access by new competitors.

The net sales, gross profit, EBITDA and EBIT have been progressively increasing for the company from 1988 to 1998. However, the sales growth increased from 7.2% in 1988 to 18.8% in 1991, later the sales growth declined to 1.5% in 1998. Net Income has also seen a decline from 23.9% in 1988 to 5.4% in 1998. However, the...
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