The case “Debt Policy at UST Inc.” deals with the progressively lowering growth and the company’s board decision to borrow up to $1 billion over five years to accelerate its stock buyback program. The case talks about how the company has seen its commanding market power decline over the years due to price challenge from smaller companies and has been experiencing slow growth rates due to lack of innovation in recent years. The investors had concerns regarding the future of the company and hence, the board has decided to take up recapitalization of capital structure. UST Inc. is the dominant producer of moist smokeless tobacco, or moist snuff, controlling approximately 77% of the market. UST Inc. primarily has the moist smokeless products as its premium products. It also has a secondary product- wine generating revenues for the company. When faced with stiff competition from smaller brands that had lesser prices for their products, UST Inc. did not cut down their prices; however they introduced new higher valued products to battle the competition. Also, UST- the only major smokeless tobacco manufacturer signed to an agreement of paying $100 to $200 million over 10 years and to restrictions on advertising primarily aimed at youth exposure. The company’s eroding market power along with its lowering earnings made the company decide on taking up $1 billion as debt to repurchase its stock. The effects of recapitalization of capital structure are:
* A higher leveraged company
* Rise in share price of the company and thus increasing the shareholder value * Avoiding the possibility of a hostile takeover
* Provide management with higher percentage of share ownership and control The recapitalization of the company will make UST a higher leveraged company, raise its share price, provide the management with more ownership and avoid a hostile takeover by other major players in the tobacco industry. However, the credit analysts and bond holders...
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