Premium Essay

Ust Case

In: Business and Management

Submitted By remi21
Words 1000
Pages 4
Debt Policy at UST Inc.

Executive Summary

In the 1990’s, UST was a dominant producer of moist smokeless tobacco, controlling 77% of the market. Smokeless tobacco products consist of snuff (dry and moist) and chewing tobacco (loose leaf, plug and twist/roll) categories. UST was a market leader of the snuff product category, innovating with new product forms and flavors over the years. UST has also been a profitable company, boosting its shareholders’ earnings by undertaking measures such as increasing the cost of its products steadily with time. UST also benefited from the steady increase in market demand for smokeless tobacco given the rising restrictions on cigarette second hand smoke. UST was still criticized at the time for its tardiness with new product introductions and losing its market share to new and smaller competitors. In 1997, instead of cutting product prices to compete, UST introduced new line of lower priced products such as Copenhagen Long Cut and Rooster. UST also renewed its focus on the marketing campaigns, launching promotions and increasing couponing. For years, tobacco industry had been embattled with health related lawsuits. Majority of these litigations were for cigarette companies in comparison to smokeless tobacco industry. Still, UST had seven pending health related lawsuits. UST has historically been one of the most profitable companies in corporate America. Even though S&P rated the debt of many tobacco companies as investment grade, its long term outlook of the tobacco industry was unclear given the rising restrictions on tobacco products and health awareness among consumers. Despite the questionable outlook of tobacco industry, in December 1998 UST’s board of directors decided for active capital structure change and approved the decision to borrow up to $1 billion to accelerate the company’s stock repurchase program....

Similar Documents

Premium Essay

Case Ust

...Case Study: Debt Policy at UST Inc. UST Inc. is the leading producer of moist smokeless tobacco products which manage by using the conservative debt policy and high dividend payout. Since the firm has faced the decline of the growth from year 1993, the company decided to make the recapitalization by borrowing $1 billion to repurchase their stock in order to maximize the company’s value. By borrowing, interest charged on loan is tax-deductible which the firm can benefit from tax shield and can also reduce the cost of capital. With the combination of debt and equity financing, the company can find the optimal point that reflect the lowest cost of capital which would provide the maximum valuation. Moreover, additional debt can reduce the agency cost of the company by forcing management to avoid investment in the underperform business. This can reflect the return on equity to increase which can represent the management performance and preferable for the investor. However, when the borrowing is too high, the risk of bankruptcy will be high also. Thus, it is important to include the risk of bankruptcy in the analysis of the firm. In order to make the decision about the borrowing plan of amount, cost and time, the information of the company, stakeholders and risk are needed to concern for analysis. From, the historical data and information, the company’s operation reflects the strong cash flow because of the strength and highly cash generative nature of......

Words: 3135 - Pages: 13

Free Essay

Ust Case

...group  in  a  united  and  control  manner.    These  diversification  strategies   may  also  signal  the  fact  that  managers  are  indeed  exploiting  their  cash   freedom  in  UST  Inc  with  rent-­‐seeking  intentions  such  as  empire  building   or  simply  out  of  their  own  interest   • UST  Inc  has  not  realized  strong  sales  in  the  foreign  markets  while   competitors  are  already  doing  so  in  the  lights  of  a  declining  domestic   market.       • Federal  government  would  attempt  to  pay  for  the  proposed  health  care   reform  by  dramatically  increasing  the  excise  tax  on  smokeless  Tabaco.     Financial  risks:   • The  unusually  low  amount  of  leverage  (0%)  might  signal  the  fact  that   management  does  not  want  to  have  any  debt  constraints  that  could   mitigate  their  rent-­‐seeking  behavior.    Thus,  UST  does  not  receive  any   incentive  benefit  from  debt.    Most  projects  are  financed  with  cash,  giving   managers  a  large  amount  of  freedom   • Might  consider ......

Words: 914 - Pages: 4

Premium Essay

Ust Case

...UST Inc. is considering a debt-for-equity recapitalization. In the deal, UST will issue $1 billion debt to buy back stocks. In class we argue that an important determinant of a firm’s debt policy is the tradeoff between the tax benefits of debt and the costs of financial distress and bankruptcy. Mature firms generating positive and stable operating income are more likely to take advantage of the debt tax shields and less likely to verge on bankruptcy, and thus may consider using more debt in their capital structure. Do you think UST Inc. would benefit from this transaction? Between 1988 to 1998, UST has enjoyed excellent financial performance. The firm has posted continuous increase in sales, earnings and cash over the entire period with a 10 year compound growth rates of 9%, 11% and 12% respectively. Most noticeably, the firm has also maintained margins with average gross profit, EBITDA, EBIT and nets margins of 77%, 53%, 50% and 31% respectively. Judging from the financial performance of UST (stable positive earnings), we can firmly conclude that the UST is an assets-in-place firm. The purpose of the debt-for-equity recapitalization is for UST to enhance their overall firm value. 1. First, UST will benefit from the interest tax shield. a. Tax Shield = Corporate Tax Rate * Debt = 0.38 * 1 billion = $0.38 billion In addition, the recapitalization will decrease the number of outstanding shares and as such generate higher returns for shareholders.......

Words: 1009 - Pages: 5

Premium Essay

Ust Case Study

...17 years. Many factors contributed to the success of the smokeless tobacco industry. Increases in smoking bans caused many customers to switch to smokeless. Many consumers also perceived the smokeless tobacco as less of a health risk. The price of moist smokeless tobacco is comparably less than cigarettes. It is predicted that the market will continue to grow 1-3% over the next few years. UST is the largest smokeless tobacco producer controlling approximately 77% of the market. Historically, UST has been very aggressive with its price increases. This has resulted in a solid boost in the company’s earnings, and large payouts of dividends. UST is widely known for its conservative debt policy, and high dividend payout. This gives the company considerable attention on Wall Street. Despite a recent “neutral” outlook from Wall Street, UST has decided to borrow up to $1 billion to accelerate the company’s stock program. 1. What are the primary business risks associated with UST Inc.? Historically, UST has been one of the best investments in corporate America. In 1998, UST was deemed the most profitable company, in terms of ROE, ROA and gross profit margin, by John Dorfman. However, the tobacco industry as a whole faces a lightly less certain future due to many factors. I think the text touches on this in the statement, “Despite strong cash flows, the U.S. tobacco industry is characterized by legal challenges, declining volumes, marketing restrictions, taxes,...

Words: 1327 - Pages: 6

Premium Essay

Ust Case Study

...UST Items for Discussion 1. What are the attributes and primary business risks associated with UST, from viewpoint of a potential creditor (bondholder). Attributes: UST has been a dominant producer in the tobacco industry. Also, UST is well known for its high gross profit margin, which means UST is capable of maintaining its stable financial situation. UST is a major moist smokeless tobacco producer, and the demand on moist smokeless tobacco is growing very fast due to increased government regulation on smoking. Potential business risks: UST has very little debt, which makes it more able to resist potential risk when the economy goes bad. In addition, the legislative environment is not good for UST because the government has the ongoing health concerns. Due to the high price of UST’s products, other companies selling low price tobacco threaten the market share of UST. 2. Rate the overall business risk The S&P rates UST’s long-term credit as A, and its short-term credit as A-1. However, the future of tobacco industry is unclear, and government may conduct some policy to control the tobacco industry’s growth due to health concerns. Therefore, the UST’s long-term credit should be BBB. Also, UST’s short-term credit should be lower than the S&P’s rating, which is A-2. 3. Why are they considering a leveraged recap after a long history of conservative debt policy UST’s growth rate is reducing since 1994. They are not able to make a high growth in the...

Words: 936 - Pages: 4

Premium Essay

Ust Global, India: Delivering Software Service Solutions

...UST Global, India: delivering software service solutions Balakrishnan Menon Balakrishnan Menon is a Professor in the DC School of Management and Technology, Idukki, India and Research Scholar in the School of Management Studies, Karpagam University, Coimbatore, India. 1. Introduction When the founder Chairman of US Technology Private Ltd (UST) Late Mr G. A Menon wanted to set up a software company in Trivandrum, the capital city of the communist party dominated state of Kerala in the year 1999, many people close to him warned that he was setting himself up for failure. The state of Kerala was, in those days, labeled as anti-investment and non-conducive to new entrepreneurial ventures, as it was dominated by a work force, controlled by militant trade unionism with a vested interest to keep their flocks together with age-old dogmas and philosophies. However, Mr Menon went ahead with his plan and set up the company in Trivandrum, as he was keen to do something for his home state, even when the top echelon in the Secretariat (head quarters of the state administration machinery) discouraged him. In subsequent years, UST became the largest software exporter from the state of Kerala, to USA and other countries. UST is a fully-owned subsidiary of California-based US Technology Resources LLC. Established on September 1, 1999 with barely 14 employees, the company was set up, as a 100 per cent Export Oriented Unit, to export software services and solutions, in Techno Park,......

Words: 9786 - Pages: 40

Free Essay

Fins3625 Course Outline 2014

...Australian School of Business Banking and Finance FINS3625 Applied Corporate Finance Course Outline Semester 1, 2014 Part A: Course-Specific Information Part B: Key Policies, Student Responsibilies and Support Table of Contents PART  A:  COURSE-­‐SPECIFIC  INFORMATION   1   STAFF  CONTACT  DETAILS   1.1   Communication  with  Staff   2   COURSE  DETAILS   2.1   Teaching  Times  and  Locations   2.2   Units  of  Credit   2.3   Summary  of  Course   2.4   Course  Aims  and  Relationship  to  Other  Courses   2.5   Student  Learning  Outcomes   3   LEARNING  AND  TEACHING  ACTIVITIES   3.1   Approach  to  Learning  and  Teaching  in  the  Course   3.2   Learning  Activities  and  Teaching  Strategies   4   ASSESSMENT   4.1   Formal  Requirements   4.2   Assessment  Details   4.3   Assessment  Format   4.4   Assignment  Submission  Procedure   4.5   Late  Submission   5   COURSE  RESOURCES   6   COURSE  EVALUATION  AND  DEVELOPMENT   7   COURSE  SCHEDULE   PART  B:  KEY  POLICIES,  STUDENT  RESPONSIBILITIES  AND  SUPPORT   8   PROGRAM  LEARNING  GOALS  AND  OUTCOMES   9   ACADEMIC  HONESTY  AND  PLAGIARISM   10   STUDENT  RESPONSIBILITIES ......

Words: 6032 - Pages: 25

Premium Essay

Debt Policy at Ust

...Debt Policy at UST The primary business risk facing UST in 1998 was that the U.S. tobacco industry itself was facing an uncertain future characterized by legal challenges, declining volumes, marketing restrictions, increased taxes, heavy discounting and consolidation. The U.S. smokeless tobacco industry also was transitioning away from the Premium Market and growing through the Price Value Market at a rate of 9%. Bondholders face very little investment risk given UST’s high interest coverage ratio and substantial cash flows, making UST less susceptible to the risk of bankruptcy. One would be concerned about the industry’s decline and the fact that growth is driven primarily by the Price Value Market. UST is positioned as the Premium Market leader, but owns just 6% of the Price Value Market. Of UST’s total portfolio of products, approximately 1% of the company’s 1998 tobacco sales revenue was derived from the Price Value Market. UST is facing aggressive pricing, heavy competition from new products and they are losing market share in their core operations. Their growth and pricing strategy was to introduce similar products rather than to cut prices. Further concerns are that UST has no plans to expand internationally, and both the CFO and President resigned in February 1997 due to “philosophical differences about the strategic direction of the company.” UST was facing growing threats of changes in legislation that could adversely affect the industry and faced several......

Words: 626 - Pages: 3

Free Essay

Corporate Finance

...Debt Policy at UST Inc. Executive Summary In the 1990’s, UST was a dominant producer of moist smokeless tobacco, controlling 77% of the market. Smokeless tobacco products consist of snuff (dry and moist) and chewing tobacco (loose leaf, plug and twist/roll) categories. UST was a market leader of the snuff product category, innovating with new product forms and flavors over the years. UST has also been a profitable company, boosting its shareholders’ earnings by undertaking measures such as increasing the cost of its products steadily with time. UST also benefited from the steady increase in market demand for smokeless tobacco given the rising restrictions on cigarette second hand smoke. UST was still criticized at the time for its tardiness with new product introductions and losing its market share to new and smaller competitors. In 1997, instead of cutting product prices to compete, UST introduced new line of lower priced products such as Copenhagen Long Cut and Rooster. UST also renewed its focus on the marketing campaigns, launching promotions and increasing couponing. For years, tobacco industry had been embattled with health related lawsuits. Majority of these litigations were for cigarette companies in comparison to smokeless tobacco industry. Still, UST had seven pending health related lawsuits. UST has historically been one of the most profitable companies in corporate America. Even though S&P rated the debt of many tobacco companies as investment......

Words: 1635 - Pages: 7

Premium Essay

Case Study

...Situation/Conclusion UST is the dominant producer of moist smokeless tobacco or snuff, controlling 77% of the market. UST has been one of the most profitable companies in corporate America. UST's five-year return on capital of 9.21% was nearly 20% higher than the 2nd ranked firm. Annual return on equity averaged 89% and return on assets averaged 48%. Over the same period, UST also provided a generous return on capital to investors paying $2.2 billion in dividends and repurchasing $2.0 billion in stock. However, UST also faces challenges associated with the industry in which it operates. The tobacco industry faces significant legal; however, the smokeless tobacco industry is traditionally a less litigious environment than the cigarette industry. The industry as a whole also faces challenges from declining sales volumes, marketing restrictions, high taxes, and poor public perception. Additionally while smokeless tobacco is the fastest growing segment of the tobacco industry, the market has slowed in recent years with most of the future growth expected to be coming from the low-price segment. Despite these challenges the outlook for UST is still positive. UST benefits from incredibly high margins with a gross margin of 80% compared to the tobacco industry mean of 28%. Due to the high levels of cash generation and a historically conservative debt policy, UST has historically been able to maintain very high credit ratings. UST is currently planning to reinstate a previously......

Words: 1201 - Pages: 5

Free Essay

Debt Policy at Ust Inc.

...Case 1 – Debt Policy at UST Inc. 1) UST is the dominant producer of moist smokeless tobacco, or moist snuff, controlling approximately 77% of the market. UST has been one of the most profitable companies in corporate America with low debt compared to other companies in the tobacco industry and the company has been recognized by Forbes in terms of profitability by achieving return of capital of 92.1%. Price elasticity of its products is also important while evaluating. Smokeless tobacco industry has a relatively steep demand curve and should be considered as having an inelastic consumer demand. UST has products outside of its core operations in the wine and premium cigar market also. The company built itself strong brand name recognition over the years by providing premium products. Tobacco industry does not allow new competitors to enter the market due to strict legal regulations and advertisement bans. So, we can think that UST will hold its position in the market in the long run. Although for the past couple of years, UST faced market share erosion due to price-value brands which offer low priced products. UST have been criticized for lacking innovation and new product offering. The company also has lack of international (geographical) diversity. Also, there is a chance of a cultural shift against tobacco, and UST is unlikely to expand to international market We can say that; UST is in a good position in terms of brand name and market position, capability to......

Words: 1437 - Pages: 6

Free Essay

Bmanagementusiness and

...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......

Words: 3437 - Pages: 14

Free Essay

Debt Policy at Ust Inc.

...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......

Words: 3311 - Pages: 14

Free Essay

Financial Industry

...Debt Policy at UST Case Questions Group members: Wei-Ting Liao; Cong Ren; Gerald Nyiti; Beidan Wang 1- ) Give a brief summary of the company background UST Inc. is a smokeless tobacco company which enjoyed a long tradition and a recognizable brand name. It is the leading producer of moist smokeless tobacco products and widely known for its conservative debt policy and uninterrupted cash dividend payout since 1912. The company is the major player in U.S. smokeless tobacco market. For example, it holds the maximum market share (77%) as a whole, and dominates especially in the growing segment of moist smokeless tobacco. Additionally, it has widely recognized brand and competitive positon in the market by constant innovation and new product innovation. Finally, UST has historically been one of the most profitable companies not only in the smokeless tobacco market but also in the corporate America. Although the above advantages, UST now faces with continuous threat from price-value competitors, a softening smokeless tobacco market, investors’ concern about over-investment on non-core operations and negative effect of public and political sentiment towards the tobacco industry. 2- ) Evaluate UST’s attributes/Risks from view point of bondholder The following factors weave into the risks and attributes of the company from the creditors’ point of view (“” and “” represents advantage and disadvantage, respectively): Widely recognizable brand Name UST has widely......

Words: 1876 - Pages: 8

Premium Essay

Ust Inc.

...EXECUTIVE SUMMARY UST Inc. is a principal producer of moist smokeless tobacco products,   controlling roughly 77% of the overall market, and widely known for its conservative debt policy and high dividend payout. UST also has an exceptional financial performance as net sales has been growing at 11% compounded annual growth rate, and cash flows have been growing at 12% compounded annual growth rate for the past 10 years. However, UST’s board of directors approved a plan to borrow up to $1 billion over five years to accelerate its stock buyback program in December 1998. Although this debt policy benefited UST in term of additional tax shield and rise in stock market price, however, the debt would directly increase financial distress and weaken UST’s cash flow. This report is prepared to consider debt policy for assessing a leverage recapitalization for UST and evaluate effect of dividend payment from buyback policy. After carefully evaluation of available information and using finance literature and relevant course lectures to conduct financial methodologies, including Unlevered beta, Value of levered firm with Financial Distress, Weighted Average Cost of Capital Analysis for Capital Structure Choice, and Proforma, I recommend UST to implement its one billion dollars buyback program in a period of five years. OVERVIEW OF UST Over the years, UST has been named the most profitable company in America in 1998 by Dreman Asset Management as measured by return on equity, return on...

Words: 2282 - Pages: 10