1. What are the primary business risks associated with UST Inc.? What are the attributes of UST Inc.?
Evaluate from the viewpoint of a bondholder. (Your answer should be more qualitative than quantitative!) The following factors weave into the risks and attributes of the company from the creditors’ point of view:
A. UST had seven pending health related lawsuits at the end of 1998. The outcomes of these suits are uncertain. Despite the major Medicaid state settlements, lawmakers are expected to continue to push for new laws to combat youth tobacco use. Other litigation against tobacco companies is expected to continue, especially suits filed by individuals. This uncertain litigation and legislative environment makes the future cash flows of UST risky
B. UST is a dominant player and market leader and its strategy is to combat entrants by launching similar products, rather than cutting prices. But the recent market erosion by small companies has raised concerns. And UST’s “counter attack” has not been effective in competing against price-value brands. The resignation of his CFO and
President of tobacco unit further raise the uncertainty of the company’s efficiency of solving the market erosion problem.
C. The previous uncertainty is enhanced by a lawsuit that alleged that UST had violated antitrust and advertising laws and participated in anti-competitive conduct. Should
UST lost the suite, it will be more vulnerable with competitors.
D. Although the current scientific research that ties tobacco to cancer is not conclusive, it’s uncertain that future research result will jeopardize the tobacco industry.
E. There is a chance of a cultural shift against tobacco, and UST is unlikely to expand to international market.
2. Why is UST Inc. considering a leveraged recapitalization after such a long history of conservative debt policy? (Your answer should be more qualitative than quantitative!)
A. UST wants to increase the