UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
SCHEDULE
14A
(Rule
14A-101)
PROXY
STATEMENT PURSUANT TO SECTION 14(a)
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UST
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On
September 8, 2008, Murray S. Kessler, Chairman and Chief Executive Officer of
UST Inc. (the “Company”) participated in a teleconference, together with
representatives of Altria Group, Inc. (“Altria”), concerning the proposed
acquisition of the Company by Altria organized principally for the benefit of
Altria’s investors and shareholders. Furthermore, on September 8,
2008, an employee communication was distributed to all employees of the
Company.
Set
forth below are the following: (i) the transcript of the teleconference, (ii)
the presentation displayed during the teleconference and (iii) the distributed
employee communication.
Important
Information
In
connection with the proposed acquisition, the Company intends to file relevant
materials with the SEC, including a proxy statement on Schedule
14A. The proxy statement will be sent or given to the Company’s
shareholders. Before making any voting or investment decision with
respect to the merger, the Company’s investors and shareholders are urged to
read the proxy statement and all relevant documents filed with the SEC (when
they become available) because they will contain important information about the
proposed transaction. The Company’s investors and shareholders will
be able to obtain the proxy statement and other relevant documents (when they
become available), and any other documents filed by the Company with the SEC,
through the website maintained by the SEC at www.sec.gov. A
free copy of the proxy statement and other relevant documents, when they become
available, also may be obtained from UST Inc., 6 High Ridge Park, Building A,
Stamford, Connecticut 06905-1323, Attn: Investor
Relations. Investors and shareholders may access copies of the
documents filed with the SEC by the Company on its website at www.ustinc.com.
The
Company, Altria and their respective directors and executive officers may be
deemed to be participants in the solicitation of proxies from the Company’s
shareholders in connection with the merger. Information about
Altria’s directors and executive officers is set forth in Altria’s proxy
statement on Schedule 14A filed with the SEC on April 24, 2008 and Altria’s
Annual Report on Form 10-K filed on February 28, 2008. Information
about the Company’s directors and executive officers is set forth in the
Company’s proxy statement on Schedule 14A filed with the SEC on March 24, 2008
and the Company’s Annual Report on Form 10-K filed on February 22,
2008. Additional information regarding the interests of the
participants in the solicitation of proxies in connection with the merger will
be included in the proxy statement that the Company intends to file with the
SEC.
Transcript of the
Teleconference
FINAL
TRANSCRIPT
Sep. 08.2008 /
9:00AM,MO - Altria and UST to host Webcast to Discuss
Agreement
CORPORATE PARTICIPANTS
Cliff
Fleet
Altria
Group, Inc. - VP, IR
Mike
Szymanczyk
Altria
Group, Inc. - Chairman, CEO
Murray
Kessler
UST
- Chairman, CEO
CONFERENCE
CALL PARTICIPANTS
Christine
Farkas
Merrill
Lynch - Analyst
Judy
Hong
Goldman
Sachs - Analyst
Nik
Modi
UBS
- Analyst
David
Adelman
Morgan
Stanley - Analyst
Chris
Growe
Stifel
Nicolaus - Analyst
Ann
Gurkin
Davenport
& Company - Analyst
Erik
Bloomquist
JPMorgan
-Analyst
Thomas
Russo
Gardner,
Russo, Gardner - Analyst
John
McMillin
Lord
Abbett - Analyst
Kelo
Reed
Credit
Suisse - Analyst
Brad
Dorsman
Reuters
- Media
Todd
Duvick
Banc
of America Securities - Analyst
Mark
Alter
Credit
Suisse - Analyst
Andy
Baker
Jefferies
& Company - Analyst
Nick
Tiano
-
Analyst
Jason
Dall
ASB
Advisors - Analyst
Andrew
Kieley
Deutsche
Bank - Analyst
PRESENTATION
Operator
Good
morning and welcome to today's Altria Group and UST conference call. Today's
call is scheduled to last about one hour including remarks by Altria and UST's
management as well as the question and answer session. (OPERATOR INSTRUCTIONS)
Media representatives on the call will be able to ask questions following the
conclusion of questions from the investment community.
I
would now like to turn the call over to Mr. Cliff Fleet, Vice President of
Investor Relations for Altria Client Services. Please go ahead,
sir.
Cliff Fleet - Altria Group, Inc. - VP,
IR
Good
morning and thank you for joining our call. This morning we will discuss the
Altria agreement to acquire UST. Our remarks contain forward-looking statements
and projections of future results and I direct you to the Safe Harbor statement
in this morning's press release for a review of the various factors that could
cause actual results to differ materially from projections. I'll also encourage
you to read other important information about the announcement in this morning's
press release in the section entitled "Other Information". Please note that in
this morning's call we will only be discussing the UST acquisition. Following
today's remarks investors and media representatives will be able to ask
questions about the announced agreement to acquire UST. Now it gives me great
pleasure to introduce Mike Szymanczyk, Chairman and Chief Executive Officer of
Altria Group.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Thank
you, Cliff and good morning to everyone. This is a very exciting day for all of
us and I think as most of you know, we announced earlier today that Altria and
UST have reached a definitive agreement for Altria to acquire all of the
outstanding shares of UST for $69.50 per share in cash. The transaction reflects
an enterprise value of $11.7 billion for UST including the assumption of
approximately $1.3 billion of debt. This transaction is strategically compelling
and financially attractive for several reasons. First, it creates a total
tobacco
platform
with premier brands across multiple tobacco categories. The acquisition of UST
adds the number one and number two premium moist smokeless tobacco brands,
Copenhagen and Skoal, to the strong brand portfolio of Altria's tobacco
operating companies. This portfolio currently includes powerful brands like
Marlboro and Black & Mild. Second, it generates anticipated annual synergies
of approximately $250 million by 2011 through reduced selling, general and
administrative and corporate expenses. Third, it also is expected to be
accretive to Altria's adjusted diluted earnings per share within 12 months of
closing, and it enhances Altria's ability to generate an attractive total
shareholder return that is expected to exceed our 12% goal, while diversifying
Altria's revenues and operating income.
Altria
is a financially disciplined business in its approach to growth in the
investment of its shareholders' capital. Last year's acquisition of John
Middleton Company in the growing machine made large cigar segment is an
excellent example of that approach. We believe that the acquisition of UST and
its iconic brands in the growing MST category represents another great
opportunity for us.
Any
significant acquisition that Altria pursues has to do several things. First, it
has to fit with Altria's mission to own and develop financially disciplined
businesses that are leaders in responsibly providing adult tobacco consumers
with superior branded products. Second, it needs to enhance Altria's ability to
increase revenues and earnings growth rates over the long term and third, it has
to exceed Altria's financial return hurdle rates. Fourth, it has to utilize and
complement Altria's existing strengths and infrastructure. And finally, it needs
to allow us to leverage our strong and flexible balance sheet.
The
UST transaction squarely meets each one of these criteria. The acquisition will
give Altria immediate national scale in the highly profitable MST category. Over
the past two years MST industry volume has grown over 7% per year. After
cigarettes, the MST category has the largest annual pre-tax tobacco profit pool,
estimated at $1.1 billion. UST's subsidiary, US Smokeless Tobacco Company is the
leading MST producer and marketer. In 2007 US Smokeless Tobacco earned over 70%
of the category's pre-tax profit pool. Its 56% adjusted operating margins are
higher than those of other MST manufacturers, and higher than PM USA's cigarette
margins. The company has a 58% share of the MST category, and its two premium
brands, Copenhagen and Skoal, have a combined share of almost 50%.
Upon
completion of the acquisition, Altria's operating companies will offer adult
tobacco consumers superior premium branded products in the cigarette, MST, and
machine-made large cigar categories, which are the three largest and most
profitable tobacco segments in the United States. Altria's acquiring UST at a
price that is attractive for both companyies shareholders. At 12.1 times 2007
EBITDA, the purchase price represents a multiple within the range of those paid
in recent tobacco acquisitions. We are excited about this strategic and
financially attractive acquisition, as it will enhance our ability to deliver
superior shareholder returns. Now I'd like to introduce Murray Kessler, UST's
Chairman and Chief Executive Officer, who will discuss why this transaction
benefits UST and its shareholders.
Murray Kessler - UST - Chairman,
CEO
Thank
you, Mike. Today is also a historic day for UST and its shareholders. UST's
Board of Directors has unanimously approved the terms of the acquisition
agreement. Upon closing of the transaction, shareholders of UST will receive
$69.50 per share in cash which represents a 29% premium based on UST's latest
three-month average stock price. I
believe
that Altria's paying a fair and attractive price to UST's shareholders and our
Board will be recommending that our shareholders vote to approve this
transaction.
This
combination will provide Altria with the largest and most profitability moist
smokeless tobacco company in the world which has great brands such as
Copenhagen, Skoal, Red Seal and Husky. As you know UST also has a great wine
business, Ste. Michelle Wine Estates, which is the fastest growing Top 10 winery
in the United States. In addition to the great brands and physical assets,
Altria will benefit from a talented, dedicated and knowledgeable group of
employees that have tremendous expertise in the smokeless and wine
categories.
As we
explored this deal, I was very impressed with how Altria and its operating
companies manage their businesses and treat their employees. Altria and UST
share similar business philosophies and values. For example, both companies are
focused on responsibly marketing high quality premium-branded products,
investing in brand-building equity programs, developing innovative new products,
reducing costs through disciplined cost management and addressing societal
concerns relevant to their respective businesses. This transaction has other
significant benefits: Brands in the portfolio will benefit from our combined
experience and knowledge in managing highly profitable premium brands. UST's
smokeless tobacco business will be able to access the Altria family of
companies' more comprehensive infrastructure and resources, so Copenhagen and
Skoal, and our other brands can achieve the full potential of the category
growth strategy we embarked on eight years ago and both companies can reduce
redundant costs and infrastructure to make them more efficient and profitable
than could have occurred on a stand alone basis while at the same time adding
value to consumers. I realize that today's announcement is a major change for
UST and our talented and dedicated employees. Based on my experience, I am
confident that the UST organization will rise to the occasion, embrace the
change, and make this transaction a success.
On a
personal note, I look forward to working with Mike and his team to seamlessly
integrate UST into the Altria organization and make this business combination a
success. And I'll now turn the call back over to Mike, who will discuss other
details of the transaction.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Thank
you, Murray. Altria expects this acquisition to be accretive to Altria's
adjusted diluted earnings per share within 12 months of the closing and to
generate an attractive double-digit economic return. Acquiring UST will grow and
diversify Altria's operating income and net revenues. For the first half of
2008, UST had reported operating income of $450 million. If Altria had owned UST
since the beginning of 2008, Altria 's first half of 2008, net revenues would
have increased 10.3 % to $10.4 billion. In addition, UST is expected to
contribute over $500 million in operating free cash flow per year.
The
transaction also provides Altria with the opportunity to leverage its strong
balance sheet. The company has obtained new bridge financing commitments
totaling $7 billion from Goldman Sachs & Company and JPMorgan, which
together with our existing credit facilities and cash will be more than
sufficient to fund the transaction. Altria intends to access the public debt
market to refinance a portion of its credit facilities. To help Altria achieve
the highest credit ratings on such refinancings, PM USA, a wholly-owned
subsidiary of Altria, has issued guarantees for Altria's debt.
In
conjunction with the acquisition, Altria has modified its two-year, $7.5 billion
share repurchase program. The Board of Directors has approved a three-year, $4
billion program, which runs from 2008 through 2010. Altria spent approximately
$1.2 billion repurchasing 53.5 million shares of its stock in 2008 and the
company expects to resume purchasing stock against this modified program in
2009.
Altria
continues to be committed to returning cash to its shareholders through
dividends. Altria anticipates maintaining a dividend payout ratio of
approximately 75% post-transaction. Payment of future dividends is at the sole
discretion of Altria's Board of Directors. The integration is anticipated to
generate approximately $250 million in annual synergies by 2011, primarily
driven by reduced selling, general & administrative and corporate expenses.
Altria believes that these estimated synergies will enable the Company to
deliver increased shareholder and consumer value. These synergies would be in
addition to Altria's previously announced goal to reduce costs by over $1
billion by 2011, off its 2006 cost base.
Until
the deal closes, I cannot go into specifics of the integration or operating
plans but Murray and I will be working together diligently over the coming
months planning for a smooth transition in order to realize the full benefits of
this transaction. Both companies have talented and dedicated employees who have
a history of successfully managing complex and challenging organizational
changes. Following the completion of the transaction, Murray will be named Vice
Chair of Altria, reporting directly to me. I am pleased Murray has agreed to
stay on board to oversee the UST integration and help complete the transition. I
also want to welcome the UST employees to the Altria family of companies. They
will be joining a talented, high caliber organization with a very bright
future.
The
transaction is subject to UST shareholder approval and customary regulatory
approvals, which will be pursued promptly. Shareholders of UST will vote on the
transaction at a special shareholder meeting that will be scheduled at a later
date. I conclude by saying that I believe that the agreement to acquire UST
demonstrates our commitment to deliver superior shareholder return over the long
term and is compelling from a strategic and financial perspective. This deal
advances Altria's mission to own and develop financially disciplined businesses
that are leaders in responsibly providing adult tobacco consumers with superior
branded products. So thanks very much for listening. Murray and I would be happy
to answer any questions that you might have at this point.
QUESTIONS
AND ANSWERS
Operator
Thank
you. (OPERATOR INSTRUCTIONS) We will be taking questions from the investment
community first followed by questions from media representatives. We will
compile the Q&A roster. Your first question is from Christine Farkas from
Merrill Lynch.
Christine Farkas - Merrill Lynch -
Analyst
Thank
you very much and congratulations Murray and Mike. I had a couple of questions
if I could. Firstly, just I guess a housekeeping if you can just confirm what
you're anticipated debt to EBITDA ratio might be on the completion of this deal
and just talk about the investment grade ratings? And then a question about what
you might see as opportunities
at
retail, how could this larger stronger company now deal with retail and perhaps
your lobby efforts in Washington? Thanks.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
good morning Christine. This is Mike. As to your first question, I think that
what you'll see is we'll be about 1.9 in terms of a ratio on debt to EBITDA,
once we complete the transaction. I believe that Moody's and S&P are out
with their credit rating right now. Moody's has us at BAA1 with a negative
outlook and S&P has us at BBB plus, with a negative credit watch pending the
completion of the transaction, but I think that we're pretty clear that this
deal will be completed and we will maintain our goal of being investment grade
so I think we're pretty comfortable with where we are on that. As to the
particulars of what happens going forward, it's a bit early for us to get in the
conversations about that. I will say that there are very strong sales resources
in both companies and there's both an opportunity there for synergy and for a
better outcome for retailers in terms of how we service them so we will be, as
we get to closing, we'll be working on how do we take advantage of what we've
got here to build shareholder value.
Christine Farkas - Merrill Lynch -
Analyst
And
Mike your comments had a lot to do with cost savings. Clearly would you
anticipate opportunities at the top line as well?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
I think that the objective here of this transaction is to allow us to have
greater top line and bottom line growth. We are a company that's interested in
having strong franchises but also maximizing the return that we get for our
shareholders. So one of the reasons why we find this attractive at this point in
time is that we believe that if we add this to our portfolio that the aggregate
of the businesses that we will own will allow us to create top line and bottom
line growth for shareholders.
Christine Farkas - Merrill Lynch -
Analyst
Thank
you very much.
Operator
Thank
you. Your next question is from Judy Hong with Goldman Sachs. Please go
ahead.
Judy Hong - Goldman Sachs -
Analyst
Thanks
good morning everyone. Mike, I was wondering if you could just share your view
of the current price gap situation in smokeless and whether when you indicate
that this transaction could also enhance consumer value whether that indicates
your thinking and perhaps adjusting that price gap situation in
smokeless?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Sure,
Judy, and good morning. Look, I think one of the things that's great about this
kind of a transaction is it really is a consolidation and the consolidation
provides a number of benefits to us. It does create synergies. It does create
value that could not otherwise exist if you didn't put the two companies
together. When we have looked at UST's brands particularly Copenhagen and Skoal,
what we see are brands with very strong underlying dynamics but they're
exhibiting some share decline which is an indication of a bit of a value
equation problem, so as we look at the combination of the two companies what we
see is an opportunity to take our long experience in dealing with that kind of
an issue as well as the value that's created by putting the two companies
together, solve that, and have brands that achieve our goal of modest share
growth while maximizing the income return that we get for our investors. So we
actually see that as something that were very adept at dealing with and we have
strong infrastructure actually that we can use to help manage that very
effectively I believe, so it's just one of the reasons why this transaction
makes so much sense is when you put it all together, it does give you the
opportunity to have very strong brand franchises, create some additional value
for consumers, and the net of that is going to be more value for our
shareholders.
Judy Hong - Goldman Sachs -
Analyst
And
do you have a sense of what the appropriate price gap might be in smokeless?
Clearly, in cigarettes you target 45%. Is there any reason to think that
smokeless would be any different?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
look, once again, we look at the total value equation here. We have kind of a
complex formula that we use and we examine a value equation, and so ultimately,
how we go about improving the value equation on those brands I think will unfold
once we own the company, but I wouldn't look at it as simplistically as simply
price gap issue. It's a value equation issue and I think that we're pretty
comfortable that we'll be able to deal with it successfully.
Judy Hong - Goldman Sachs -
Analyst
Okay,
and then on the share buyback program, Mike, the modified program is lower than
your previous program. I'm just wondering how you'd think about sort of longer
term share buyback opportunity especially in conjunction with thinking about now
some of the assets
like
the wine business or you still have the stake in SAB Miller and sort of
balancing, potentially monetizing those assets with share buyback
opportunity.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Okay.
Well, just in terms of perspective, while we modified our share buyback program
here a bit, in order to really complete this transaction and what we think is
the best way at this point in time, and the least complex way to do it, we're
still committed to share buybacks for our shareholders. We think they play a
role in a company that creates as much cash as this one does and so we'll
continue to be focused on ways to do that, but on the near term, we couldn't not
take the opportunity to add the top line and bottom line growth potential from a
strong business like this to our portfolio of businesses so it seems like an
excellent use of our balance sheet to go ahead and make the acquisition, make
this modification and then continue to look at buybacks going forward into the
future as an opportunity.
Relative
to other assets, one you mentioned is the wine business. Once we own the Company
we'll take a look at the wine business and well make a determination as to
what's the best way to create value for shareholders relative to that. And SAB
Miller continues to be a strong platform on our balance sheet. Obviously,
helping us maintain investment grade credit ratings as we go through a
transaction like this performing well and so we're continuing to be comfortable
with it as an item that helps us have the balance sheet flexibility and strength
we think that is important to maintain.
Judy Hong - Goldman Sachs -
Analyst
Okay,
and then my last question, your anticipated closing date of the transaction and
then how you think about the potential anti-trust hurdles on this
transaction?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Yes.
Well, obviously the closing date is dependent upon it meeting all of the
customary regulatory requirements and receiving approval. I will tell you that
as a part of this transaction, we and UST have done a thorough examination of
the regulatory requirements for this type of transaction and this one in
particular, and we believe that the transaction meets the requirements. As to
the specific timing of going through all of those approvals is a bit hard to
predict that at this point in time, but we would hope that we get that
accomplished as rapidly as possible and we will be moving forward to do
that.
Judy Hong - Goldman Sachs –
Analyst
Okay,
thank you.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Thank
you.
Operator
Thank
you. Your next question is from Nik Modi with UBS. Please go ahead.
Nik Modi - UBS - Analyst
Thanks,
good morning guys.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Good
morning, Nik.
Nik Modi - UBS - Analyst
Just
a couple quick questions. Murray, will you still be paying the upcoming dividend
I think it's supposed to go X dividends in a couple of days here?
Murray Kessler - UST - Chairman,
CEO
The
merger agreement not only allows for that dividend to be paid but until the
transaction closes to continue to pay dividends in a normal manner.
Nik Modi - UBS- Analyst
Excellent.
And then Mike, if you can just share your thoughts on the Marlboro MST test and
will you be pursuing kind of a dual branded strategy with the base UST
Copenhagen Skoal brand as well as continuing to try to test Marlboro in the
category?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
the test for Marlboro in the smokeless business will continue as they are in
place, and we continue, I think, to view Marlboro as having a role in the
smokeless business going forward into the future, so as to the particular brand
strategies I think those will unfold over time, but we believe Marlboro has a
role in the smokeless business and frankly, this
acquisition
will add some benefits to the brand in terms of our ability to carry that
forward in a financially disciplined way.
Nik Modi - UBS - Analyst
And
then just the last question. Mike, when you look at UST's business and you've
done your due diligence, have you identified any best practices that UST uses or
implements and how it can benefit your kind of base business in terms of
processes or strategies or promotional tactics?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
I think that UST is a very well run business. I mean, one of the things that's
attractive about this kind of a transaction is that the Company has strong
management. It's been led extraordinarily well by Murray, and it's in a very
good position, but the value that's created that we're going to get by putting
them together as I've articulated a few minutes ago is going to add to the
ability of management to make more out of the company than it is
today.
I
think that in particular when you look at UST from our perspective as being a
company that has virtually really no position in the smokeless business at this
point, there's a lot for us to gain by this acquisition in that particular area,
particularly in areas like managing a business with a short shelf-life like
Copenhagen, so they have extraordinary competencies in those areas and others,
so I think we'll get a lot of benefit.
Murray Kessler - UST - Chairman,
CEO
And
Mike if I could just say, I think we're going to learn a lot about each other
over time and find out strengths and weaknesses of each other and they're world
class organizations on both sides and successful companies on both sides so I
think well learn a lot more about that as time goes on but I really do believe
what I said in my comments, that there is a remarkably similar culture and value
system and belief in brand building and I think those efficiencies will play out
over time. It's really a great combination, Nik.
Nik Modi – UBS - Analyst
Yes.
I agree. Congratulations to you guys.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Thank
you.
Operator
Thank
you. Your next question is from David Adelman, with Morgan Stanley. Please go
ahead.
David Adelman - Morgan Stanley -
Analyst
Good
morning. Mike, I wanted to ask you several things. First, is it correct that
under your ownership ongoing share loss and an ongoing mix shift towards private
label or price value rather, at MST wouldn't be acceptable?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
I wouldn't describe it that way, David. What I would say is that we look at
premium brands as brands that need to exhibit modest share growth and so our
goal will be on our two premium brands once they're acquired here, Copenhagen
and Skoal to achieve modest share growth.
David Adelman - Morgan Stanley -
Analyst
Can
you frame for us what level of annual incremental investment you think that will
require?
Mike Szymanczyk -Altria Group, Inc. - Chairman,
CEO
Well,
I think it's a bit early for us to do that but as I've stated a little bit ago,
we've looked at the value equation circumstance here and I think we're pretty
comfortable that we can deal successfully with it and at the same time show very
strong performance from the business.
David Adelman - Morgan Stanley -
Analyst
Secondly,
Mike, can you talk generally about how you get to double digit returns? Because
it looks like on next years consensus forecast for UST, even if you got half of
the synergies you'd still be at an ROIC of maybe 6%. So what gets you from there
to double digits?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
I think once we've closed the deal, David, we'll be able to talk to you more
specifically about our forecast going forward. Right now, I think it's a little
premature for us to do that.
David Adelman - Morgan Stanley -
Analyst
Okay
two other things, Mike. One is, are you going to subject UST's marketing to your
self- imposed restraints, as an example you elect not to advertise in magazines,
they do.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Yes,
once again, once we get to the point that we've closed a deal, we can talk about
how we're going to view managing the business going forward.
David Adelman - Morgan Stanley -
Analyst
Okay
and then lastly, Mike, what's changed? Because three months ago I got the sense
that you were almost exclusively committed to an organic development approach in
smokeless. Is it that you aren't pleased with the performance of Marlboro? Is it
that the accelerated rate of category decline in the cigarette segment is
changed your thinking?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
David, we're still committed to an organic strategy related to Marlboro and I
view this separate and apart from that strategy. I think as we've looked at this
since the spin, and examined it, what we concluded was that if we could do a
transaction, that acquired this business and added it to our portfolio of
businesses, what we would do is take the aggregate circumstance that we're in to
a position where we could really improve top line and bottom line operating
growth and that that was something that we should do, particularly in that one
of the issues we hear from investors is questions about the whole cigarette
industry decline rate.
So
its really looking at a particular transaction examining it financially, taking
a look at what the net result of the combination produces in terms of value and
then seeing if you can do a deal that makes sense for your shareholders and in
the end, after a lot of conversation, we believe that we've come to that point,
and this is just a reasonable transaction for us to do that strengthens the
Company, creates more opportunity for top line and bottom line growth over a
longer period of time than if we didn't do the transaction. It doesn't remove
the opportunity for smokeless tobacco from an organic point of view using a
cigarette brand from the opportunity list for us. That continues to be something
that we'll work on.
David Adelman - Morgan Stanley –
Analyst
Thank
you.
Operator
Thank
you. Your next question is from Chris Growe with Stifel Nicolaus. Please go
ahead.
Chris Growe - Stifel Nicolaus –
Analyst
Hi,
good morning.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Good
morning.
Chris Growe - Stifel Nicolaus -
Analyst
My
first question for you is just that, just to kind of come back to an earlier
question in response, Mike, is that should we read through your comments that in
order for Marlboro MST or even Marlboro Snus to really go ahead, you needed a
better framework, a better business position in that category to really move
those products ahead?
Mike Szymanczyk - Altria Group, inc. - Chairman,
CEO
Well,
no. I wouldn't say that. I think that once again, there are really two separate
and distinct issues. One of them is taking our brand Marlboro and beginning to
position it in the smokeless category in some ways that are unique to it and
then the other is really looking at a business that when added to our portfolio
of businesses actually improves our overall ability as a corporation to produce
top line and bottom line growth. So both are opportunities for us. There are
different opportunities, there will be synergies that are created between the
businesses that can facilitate growth in different areas of each business, but
in the end, I view this as a platform that adds some growth potential because
the category is growing at a nice rate. It adds to our Middleton business'
growth platform, and both of those then when on a weighted basis averaged into
our results in our cigarette business which actually is performing quite nicely
for us but we all know the cigarette business is an industry where we're showing
a rate of decline versus growth in these other two areas, when you put that all
together you get a stronger platform to produce top line and bottom line growth.
It's really that straightforward. It isn't really about Marlboro. It's about
looking at the aggregate of the businesses that we have and what they can
produce.
Chris Growe - Stifel Nicolaus -
Analyst
Okay
that makes sense. My second question was just relative to you gave some criteria
earlier on in your remarks saying five criteria you look at for acquisitions and
the first one was just that you look for businesses with leading positions in
their categories so obviously that limits you here in terms of this category so
was this one of the few businesses or the only business you considered in the
smokeless category or can you talk about why you need to have a leading position
in the businesses you pursue for acquisition?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
I think what we say is that we really like that leading brand positions and so
obviously, UST meets that criteria. It has leading brands, and that's because
we're set up to run premium brands that are strong brands and to build on those
platforms. So I won't comment on other opportunities but I think that it's
pretty obvious that this Company has the leading brands in it, and for us it
meets that criteria.
Chris Growe - Stifel Nicolaus –
Analyst
Okay,
thank you.
Operator
Thank
you. Your next question is from Ann Gurkin with Davenport. Please go
ahead.
Ann Gurkin - Davenport & Company -
Analyst
Good
morning.
Mike Szymanczyk - Altria Group,Inc. - Chairman,
CEO
Good
morning.
Ann Gurkin - Davenport & Company -
Analyst
Just
wanted to return to the discussion on the premium segment. Do you have the
confidence that the premium price per can can be maintained or does that level
need to be reset and then can you also comment on your long term perception of
the growth for the domestic smokeless segment?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
relative to your first question, Ann, I'm not going to get into specific pricing
but once again, I think that the declines that we're seeing in the shares of
these brands reflects the fact that there's some tweaking of the value equation
that needs to be accomplished and again I think the combination of the synergy
value that's created as well as the infrastructure strength that we can bring to
this business will allow us to make those tweaks
and
return those brands to some modest share growth. So I think that that's the
right position for us to take. What was your second question?
Ann Gurkin - Davenport & Company -
Analyst
Your
outlook--?
Murray Kessler - UST - Chairman,
CEO
I'll
take the second question, I think, Ann, is category growth, we continue as a
company to forecast North of 5 to 6% category growth and that's certainly not
going to be hurt by everything you heard here this morning. It should
ultimately, if consumer value is benefited it should only be accretive to that
over the long term but our call right now would be the category continues to
grow in that 5 to 6% range.
Ann Gurkin - Davenport & Company -
Analyst
Great
and then Mike I wonder if you can comment on the ability to leverage Altria's
tremendous operating or manufacturing efficiencies to the production of the
smokeless products? Are there synergies or opportunities that you can transfer
your manufacturing expertise to smokeless?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
I think we're going to acquire some actually fine smokeless tobacco
manufacturing facilities as a part of the transaction. Our facilities, our
cigarette manufacturing facilities we do have some capacity that we're utilizing
the test market, but we don't envision changing the manufacturing set up for
UST. We expect that we'll continue to have the facilities that we acquire
manufacture the product.
Ann Gurkin - Davenport & Company –
Analyst
That's
great. Thank you.
Operator
Thank
you. Your next question is from Erik Bloomquist with JPMorgan. Please go
ahead.
Erik Bloomquist - JPMorgan -
Analyst
Hi,
good morning.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Good
morning, Erik.
Erik Bloomquist - JPMorgan -
Analyst
One
question with respect to the price gap issue. Is it a fair implication from that
that the combined Company will now be redoubling its efforts to change tax laws
in order to close price gaps?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
we'll examine that issue once we complete the transaction. Right now, I think
the companies have a pretty similar view on taxes anyway, but I'm not going to
comment on an overall strategy until the deal closes.
Murray Kessler - UST - Chairman,
CEO
From
UST's perspective in the interim having a fair taxation methodology, that
removes the tax subsidy, has been our top state lobbying priority and that
remains unchanged.
Erik Bloomquist - JPMorgan -
Analyst
Okay,
thank you. And then secondly, with respect to continuation of the Marlboro brand
in smokeless, is it fair to think that perhaps the Marlboro future in smokeless
is more on the Snus side than in the traditional MST, or could you give us some
thoughts around that?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
once again, we think that the brand has the potential to offer a number of
different value propositions to the consumer in the smokeless area. We have two
in the marketplace right now. They're learning environments for us. We learn a
lot and I think that as we go forward into the future we will position Marlboro
and adjacent smokeless products that we think make good sense for us. So I think
to go beyond that would be disclosing competitively sensitive information, so I
just strongly emphasize to you we think it has a place in the smokeless area and
we're going to be working to take advantage of that opportunity.
Erik Bloomquist - JPMorgan -
Analyst
And
then lastly, just a housekeeping question. What's the deal cost of financing or
could you give us the bridge financing all in cost?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
No. I
can't, not at this time.
Erik Bloomquist - JPMorgan -
Analyst
All
right, thank you.
Operator
Thank
you. Your next question is from Thomas Russo with Gardner, Russo, Gardner.
Please go ahead.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Good
morning Tom.
Thomas Russo - Gardner, Russo, Gardner -
Analyst
Good
morning, congratulations.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Thank
you.
Thomas Russo - Gardner, Russo, Gardner -
Analyst
Yes,
and Mike, you had mentioned the modified share repurchase, I'm not clear on what
is under way there. Have you increased the amount but stretched out the
duration?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
No.
What we've done is we've gone from a $7.5 billion program over two years to a $4
billion program that is spread over three years, and that includes 2008 in both
cases.
Thomas Russo - Gardner, Russo, Gardner -
Analyst
Okay,
great. Thank you for that. You also mentioned that the cost synergies that you
expect to realize through UST are independent of those that you continue to
forecast for Altria independently. What are those numbers for yourselves and how
are you coming along with realizing those?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
the number that we have given has remained unchanged. Tom, it was used starting
in 2007. It's $1 billion. We're well on track on that. In fact I think our
second quarter earnings reflected some real strength in that particular
area.
Thomas Russo - Gardner, Russo, Gardner -
Analyst
Thank
you, and Mike, the last point is you mentioned in passing that the acquisition
might have some positive impacts on John Middleton, and I'm wondering what you
might think about there?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
what I was really referring to Tom is not so much direct impact on Middleton,
but to say that the large manufactured cigar business is a growth business and
so is the MST business, and so when we take those two businesses and aggregate
them with our cigarette business what it does is improve our overall ability to
reflect operating income top line and bottom line growth, because if you
reweight it what you see is that you have a combination of industries that are
declining when you look at the cigarette business as a part of that at a rate of
1, 1.2% per year versus cigarette decline rate of 3 to 3.5% a year.
Thomas Russo - Gardner, Russo, Gardner -
Analyst
Yes.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
So
you add it all together it puts us in a much better position to use synergies
and share growth and revenue growth to create top line and bottom line results
that are better than we can with just the cigarette business. Or just the
cigarette and the cigar business.
Thomas Russo - Gardner, Russo, Gardner -
Analyst
Thank
you. Very helpful.
Operator
Thank
you. Your next question is from John McMillin with Lord Abbett.
John McMillin - Lord Abbett -
Analyst
Murray,
I always knew this was in the toolbox I guess. Mike, it seems do me like you're
not changing anything. Earnings estimates, growth rates, you're saying the deal
would be accretive but you're not kind of giving numbers. Was this kind of in
your plans when you made your targets a few months ago or why aren't you kind of
like being more specific in terms of what this deal can add?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Yes,
well, no. The answer to your first question is it wasn't in our targets when we
started. What we said here is that we believe going forward the results will be
better than the 12% total shareholder return goal that we have set and that
we've talked about when we went into the spin back in the end of March, and I
think once the deal closes, then we can start to be more specific about what we
think the impact will be on our results but at this point, I think it's
appropriate for us to simply say we think it's a positive transaction. We think
it strengthens our ability to produce results and we believe that we're firmly
in the position to produce better than the 12% total shareholder return goal
that we have set.
John McMillin - Lord Abbett -
Analyst
And
just if I could ask Murray, there is this feeling on this call that you had kind
of run out of tools in your tool box to keep the earnings stream going if the
price gap was getting more and more difficult and the need for promotion was
accelerating. Can you comment on that?
Murray Kessler - UST - Chairman,
CEO
Yes,
I don't agree with that at all. I think that--.
John McMillin - Lord Abbett -
Analyst
Well,
that's definitely the tone of what people are saying today. They're feeling like
you just kind of ran out of tools and are doing this.
Murray Kessler - UST - Chairman,
CEO
No, I
think I've been very very clear that over the past number of years that I viewed
that we had to continue to deliver a 10% owner owned total shareholder return on
a consistent and sustainable basis but I wasn't happy that we weren't growing as
fast as the category and that our goal was while delivering a consistent and
sustainable return to continue to take the steps to grow and to increase value
and to ultimately, and I think I've used the analogy of a dimmer switch instead
of flipping a light switch to gain on that category growth and I think we've
done that nicely. The net result of it is though that that is a slow and steady
pace of where our company continues to grow, deliver consistent returns, reward
shareholders and then take every other dollar that we would generate beyond that
10% total shareholder return and reinvest it for faster growth. When you model
that out over the next three or four years and you compare that to the $69.50
price, the $69.50 price we don't deliver the same return that we're delivering
shareholders today. I ultimately work for the shareholders and the premium that
has been offered within this deal and the positive outlet growing as fast as the
category meant this was the right decision, but I believe we would have
continued to be very successful as an independent Company but this is the right
deal for the shareholders now.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Look,
I don't think there's any question that both of these companies are doing just
fine, but there's also no question that when you put them together, the
consolidation creates an extraordinary amount of value for consumers and for
shareholders, and that's why it's smart for us to do this. It's not that one
isn't able to perform without the other. It's that when you put them together,
you just create much more value than you can get when they're
apart.
John McMillin - Lord Abbett -
Analyst
Thanks
a lot.
Operator
Thank
you. Your next question is from [Kelo Reed] with Credit Suisse. Please go
ahead.
Kelo Reed - Credit Suisse -
Analyst
Good
morning. I wanted to get back to the price gap issue one last time. Mike, when
we met with you in May you seemed to indicate you thought $3 is about the right
price for a can of premium MST. Does that assessment still hold?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
once again, I think that to get into specifics about particular areas of the
value equation is inappropriate at this time but as I've said before I think
that the transaction creates lots of value and that it will be important for us
to take some of that value and use it to adjust the value equation for the
consumer on Copenhagen and Skoal, so that we can return those brands to some
modest share growth and well get into how we do that when its time to go to the
marketplace but right now, we have to concentrate on getting the deal
closed.
Kelo Reed - Credit Suisse -
Analyst
So
you don't want to share with us yet how much of the expected synergies will go
to shareholders and how much will go to consumers?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
That
was kind of a nice way of saying, no.
Kelo Reed - Credit Suisse -
Analyst
Very
good. Then, does this mean that your adjacency strategy is pretty much complete
now, now that you have the large machine made cigars that you have smokeless
products, is there anything else that you'll be looking for?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
certainly, I think there are opportunities to create new products in the
adjacency area and that's an effort that we have going on in R&D and I think
UST has gone on in their R&D operation as well so no, I wouldn't suggest
that it's the end of adjacency. I think that it's just a broadening of the
platform from which adjacency can be pursued and that's what acquisition does
for you when you're on an adjacency strategy. It just broadens the platform so
that you can pursue an even greater amount of adjacency activity going forward
into the future.
Kelo Reed - Credit Suisse -
Analyst
Okay.
And then one last question. With the acquisition you're also getting the wine
business which obviously doesn't really fit into a total tobacco model. What are
your plans for the wine business?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
it's a great business. We would like to understand it a bit better and then
ultimately we'll make some decisions about how to get the best value out of it
for shareholders, so right now, we have no particular answer to that question.
We want to understand it better.
Kelo Reed - Credit Suisse -
Analyst
All
right thanks a lot.
Operator
Thank
you. We will now take questions from media representatives. (OPERATOR
INSTRUCTIONS) Your next question is from [Brad Dorsman] with
Reuters.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Hi,
Brad.
Brad Dorsman - Reuters – Media
Hi,
how you doing today?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Good.
Brad Dorsman - Reuters - Media
Good.
Obviously, this deal or the potential of this deal has been bandied about for
years now it seems. Can you give some color on how long you've been talking to
each other and how you finally came to this deal?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
I will say that we have off and on examined this and our other transactions but
really it was a few months ago after the spinoff of our International business
was completed that I called Murray and we began to have some conversations on
this subject and that's been going on for several months and I think we finally
got to the point where we both felt that we could do an excellent transaction
for both of our shareholder and that's led us to today.
Brad Dorsman - Reuters - Media
So
you first talked specifically in March or was it before then, after
then?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
No it
was after March. I think it was in--?
Murray Kessler – UST - Chairman,
CEO
May.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Yes,
the end of May I think was when we first spoke.
Brad Dorsman - Reuters - Media
Okay,
and one last attempt at the whole price value equation question. Is it fair to
say that consumers will eventually be paying less for Skoal and Copenhagen, and
it's a matter of you haven't decided how much to accomplish that and how much
less?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
I
think it's fair to say that the consumer value on Skoal and Copenhagen will be
improved once we consummate this transaction and we're able to bring some of the
value it creates to that.
Brad Dorsman - Reuters - Media
And
how do you improve that without them paying less per ounce or some way of
putting it?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Nice
try. But I've gone as far as I'm going to go on that.
Brad Dorsman - Reuters - Media
Okay,
thank you.
Operator
Thank
you. Your next question is from Todd Duvick with Banc of America Securities.
Please go ahead.
Todd Duvick - Banc of America Securities -
Analyst
Yes,
good morning. A couple quick questions on the share buyback program, could you
clarify with respect to the $4 billion authorization, the $1.2 billion that
you've already completed in 2008 does that count against that $4 billion or is
the $4 billion in addition to that?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
No.
It counts against it.
Todd Duvick - Banc of America Securities -
Analyst
Okay.
That's helpful and with respect to the debt structure going forward, can you
tell us where you're looking to have short-term debt versus long term debt, the
composition, do you kind of a rule of thumb, 25% short-term or any structure
along those lines?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
what I said was that we have obtained a $7 billion in bridge financing as a part
of this transaction, and then we'll go into the public debt market. Beyond that,
I'm not going to be more specific at this point in time.
Todd Duvick - Banc of America Securities -
Analyst
And
then just one final question, with respect to the UST notes outstanding does
Altria plan to guarantee those notes?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
I
don't -- we're assuming their debt as a part of the transaction if that's what
you mean, so when you look at the $11.7 billion value on the transaction, that
includes the assumption of $1.3 billion in debt.
Todd Duvick - Banc of America Securities -
Analyst
Okay,
that's helpful. Thank you very much.
Operator
Thank
you. Your next question is from Mark Alter with Credit Suisse. Please go
ahead.
Mark Alter - Credit Suisse -
Analyst
Thank
you. Just as a follow-up to that assumption question, you used at Moody's and
S&P used it, it's rarely used. Do you mean actually a legal assumption of
the debt so that it becomes Altria debt?
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Yes,
I don't know exactly what you mean and I'm hesitating because I don't want to
give an answer that's not complete, but I think as a part of this transaction,
we're assuming that debt, so to go beyond that we can get back to you on
that.
Murray Kessler - UST - Chairman,
CEO
Yes,
I believe the terms of our outstanding debt will probably be paid off and
refinanced into Altria but we can confirm and get back to you, but there are
very specific rules and guidelines that are in our outstanding debt issuance and
those will all be followed.
Mark Alter - Credit Suisse -
Analyst
Okay,
yes, I'd like to follow-up, thank you.
Operator
Thank
you. This conference will conclude at 10 a.m. Eastern time. Your next question
is from Andy Baker with Jefferies & Company.
Andy Baker - Jefferies & Company -
Analyst
Thank
you. All my questions have been answered.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Okay,
great.
Operator
Thank
you. Your next question is from [Nick Tiano] with [Paulson]. Please go
ahead.
Nick Tiano - Analyst
Good
morning. I had a question regarding the merger agreement which you filed. It
would seem that according to the merger agreement that there are instances in
which Phillip Morris can terminate the transaction and pay nothing and then
there seems to be an instance in which if Phillip Morris so chooses to, they
could simply terminate the transaction by paying a $200 million fee. Is my
understanding of that correct? It seemed a bit odd to me.
Mike Szymanczyk - Altria Group, Inc. - Chairman,
CEO
Well,
I think that the, actually the merger agreement is pretty straightforward and I
don't know that there's anything particularly unusual in that. I think that the
point of the agreement really takes both sides and focuses them on consummating the deal, and that's what were trying to do in that
merger agreement and it's to secure that kind of focus and to make sure that
that happens, relative to any particular causes I'd have to get out the
agreement and go through that with you, but I think that there shouldn't be any
misunderstanding other than we've entered this agreement to complete this deal
and I believe we will.
Nick Tiano - - Analyst
All
right
Operator
Thank
you. Your next question is from [Jason Dall] with ASB Advisors. Please go
ahead.
Jason Dall - ASB Advisors -
Analyst
Yes,
thank you. My questions have been answered.
Operator
Thank
you. Your final question is from Andrew Kieley with Deutsche Bank. Please go
ahead.
Andrew Kieley - Deutsche Bank -
Analyst
Mike
and Murray, I had a potential FDA regulation. Can you talk about your comfort
around long term treatment of smokeless in terms of things like flavored
varieties of MST, ability to get reduced risk classification potentially and
federal smokeless excise tax? Because you'd think with this acquisition it
implies a pretty high comfort level that you have. Thanks.
Murray Kessler - UST - Chairman,
CEO
Well,
I don't think any of our positions have changed. The House has voted on a Bill
and you know our companies' positions. It happens at both Altria and UST have
supported FDA legislation. This transaction changes none of the facts that the
smokeless tobacco consumers and the role flavors play are completely different,
that usage in smokeless tobacco is low and on a long term decline so yes, we've
continued to believe that the kind of language that's been written into the Bill
that we currently support would be maintained and it's a Bill that we support.
The reduced risk language is difficult to get through and everybody has written
about that, but ultimately, it's still UST's point of view that the only way you
get there is with a set of rules and then working through those sets of rules
and that the debate and the harm reduction debate itself has advanced to a point
where beyond discussion without some kind of regulatory body where you could let
the science go to work and test and whether it's post-market surveillance,
whatever that might be you need a framework to advance the issue and we think
ultimately in that debate and in a regimented process, smokeless will benefit.
So no, I don't see any changes from this transaction on that
regard.
Operator
Thank
you. At this time, I'd like to turn the floor back over to management for any
closing comments.
Cliff Fleet - Altria Group, Inc. - VP,
IR
We
want to thank everyone who joined us today. If you have any follow-up questions
please call Altria or USTs Investor Relations in the media service department.
Thank you very much.
Operator
Thank
you. This concludes today's conference call. You may now
disconnect.
Safe
Harbor
Statements
in this communication that are not reported financial results or other
historical information are “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current plans, estimates and
expectations, and are not guarantees of future performance. They are
based on management’s expectations that involve a number of business risks and
uncertainties, any of which could cause actual results to differ materially from
those expressed in or implied by the forward-looking statements. The
parties undertake no obligation to publicly update or revise any forward-looking
statement. The risks and uncertainties relating to the
forward-looking statements in this presentation include those described under
the caption “Cautionary Factors that May Affect Future Results”
in UST Inc.’s and Altria Group, Inc.’s respective Annual Reports for
2007, Quarterly Reports for the quarter ended June 30, 2008 and in the September
8, 2008 press release announcing Altria Group, Inc.’s agreement to acquire UST
Inc.
Other
Information
In
connection with the proposed acquisition, UST Inc. (“UST”) intends to file
relevant materials with the SEC, including a proxy statement on Schedule
14A.
INVESTORS
AND SHAREHOLDERS ARE URGED TO READ UST’S PROXY STATEMENT AND ALL RELEVANT
DOCUMENTS FILED WITH THE SEC (WHEN THEY BECOME AVAILABLE) BECAUSE THEY WILL
CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.
Investors
and shareholders will be able to obtain the documents free of charge through the
website maintained by the SEC at www.sec.gov. A free copy of the
proxy statement and other relevant documents, when they become available, also
may be obtained from UST Inc., 6 High Ridge Park, Building A, Stamford,
Connecticut 06905-1323, Attn: Investor Relations. Investors and
security holders may access copies of the documents filed with the U.S.
Securities and Exchange Commission by UST on its website at
www.ustinc.com. Such documents are not currently
available.
Altria
Group, Inc. (“Altria”) and UST and their respective directors and executive
officers may be deemed to be participants in the solicitation of proxies from
UST’s shareholders in connection with the merger. Information about
Altria’s directors and executive officers is set forth in Altria’s proxy
statement on Schedule 14A filed with the SEC on April 24, 2008 and Altria’s
Annual Report on Form 10-K filed on February 28, 2008. Information
about UST’s directors and executive officers is set forth in UST’s proxy
statement on Schedule 14A filed with the SEC on March 24, 2008 and UST’s Annual
Report on Form 10-K filed on February 22, 2008. Additional
information regarding the interests of participants in the solicitation of
proxies in connection with the merger will be included in the proxy statement
that UST intends to file with the SEC.
Presentation Displayed
during the Teleconference
Altria Group, Inc.
and UST Inc.
Announce Agreement
for Altria to Acquire UST Inc.
September 8,
2008
Safe
Harbor
Statements in this
presentation that are not reported financial results or other
historical information are “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based on current plans, estimates and expectations, and are
not guarantees of future performance. They are based on management’s
expectations that involve a number of business risks and uncertainties, any of
which could cause actual results to differ materially from those expressed in or
implied by the forward-looking statements. The parties undertake no obligation
to publicly update or revise any forward-looking statement. The risks and
uncertainties relating to the forward-looking statements in this presentation
include those described under the caption “Cautionary Factors that May Affect
Future Results” in the parties’ respective Annual Reports for 2007, Quarterly
Reports for the quarter ended June 30, 2008 and in the September 8, 2008
press release announcing Altria’s agreement to acquire UST Inc.
historical information are “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based on current plans, estimates and expectations, and are
not guarantees of future performance. They are based on management’s
expectations that involve a number of business risks and uncertainties, any of
which could cause actual results to differ materially from those expressed in or
implied by the forward-looking statements. The parties undertake no obligation
to publicly update or revise any forward-looking statement. The risks and
uncertainties relating to the forward-looking statements in this presentation
include those described under the caption “Cautionary Factors that May Affect
Future Results” in the parties’ respective Annual Reports for 2007, Quarterly
Reports for the quarter ended June 30, 2008 and in the September 8, 2008
press release announcing Altria’s agreement to acquire UST Inc.
Page 2
of 21
Other
Information
In
connection with the proposed acquisition, UST intends to file
relevant
materials with the SEC, including a proxy statement on Schedule 14A.
materials with the SEC, including a proxy statement on Schedule 14A.
INVESTORS AND
SHAREHOLDERS ARE URGED TO READ UST’S PROXY
STATEMENT AND ALL RELEVANT DOCUMENTS FILED WITH THE SEC
(WHEN THEY BECOME AVAILABLE) BECAUSE THEY WILL CONTAIN
IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.
STATEMENT AND ALL RELEVANT DOCUMENTS FILED WITH THE SEC
(WHEN THEY BECOME AVAILABLE) BECAUSE THEY WILL CONTAIN
IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.
Investors and
shareholders will be able to obtain the documents free of charge
through the website maintained by the SEC at www.sec.gov. A free copy of
the proxy statement and other relevant documents, when they become
available, also may be obtained from UST Inc., 6 High Ridge Park, Building A,
Stamford, Connecticut 06905-1323, Attn: Investor Relations. Investors and
security holders may access copies of the documents filed with the U.S.
Securities and Exchange Commission by UST on its website at
www.ustinc.com. Such documents are not currently available.
through the website maintained by the SEC at www.sec.gov. A free copy of
the proxy statement and other relevant documents, when they become
available, also may be obtained from UST Inc., 6 High Ridge Park, Building A,
Stamford, Connecticut 06905-1323, Attn: Investor Relations. Investors and
security holders may access copies of the documents filed with the U.S.
Securities and Exchange Commission by UST on its website at
www.ustinc.com. Such documents are not currently available.
Page 3
of 21
Other
Information
Altria and UST and
their respective directors and executive officers may be
deemed to be participants in the solicitation of proxies from UST’s shareholders
in connection with the merger. Information about Altria’s directors and
executive officers is set forth in Altria’s proxy statement on Schedule 14A filed
with the SEC on April 24, 2008 and Altria’s Annual Report on Form 10-K filed
on February 28, 2008. Information about UST’s directors and executive
officers is set forth in UST’s proxy statement on Schedule 14A filed with the
SEC on March 24, 2008 and UST’s Annual Report on Form 10-K filed on
February 22, 2008. Additional information regarding the interests of
participants in the solicitation of proxies in connection with the merger will be
included in the proxy statement that UST intends to file with the SEC.
deemed to be participants in the solicitation of proxies from UST’s shareholders
in connection with the merger. Information about Altria’s directors and
executive officers is set forth in Altria’s proxy statement on Schedule 14A filed
with the SEC on April 24, 2008 and Altria’s Annual Report on Form 10-K filed
on February 28, 2008. Information about UST’s directors and executive
officers is set forth in UST’s proxy statement on Schedule 14A filed with the
SEC on March 24, 2008 and UST’s Annual Report on Form 10-K filed on
February 22, 2008. Additional information regarding the interests of
participants in the solicitation of proxies in connection with the merger will be
included in the proxy statement that UST intends to file with the SEC.
Page 4
of 21
Page 5
of 21
Altria
& UST: Transaction
Overview
§ Altria agrees to
acquire UST for $69.50 per share in cash
– 28.9% premium to
three-month average UST share price
§ $11.7 billion
enterprise value for UST
– Includes
assumption of $1.3 billion of debt
– EV / EBITDA
multiple of 12.1x
§ Subject to UST
shareholder approval and customary regulatory
approvals
approvals
Page 6
of 21
Altria
& UST: Compelling
Strategic Rationale
Expected
to:
§ Create total
tobacco platform with premier tobacco brands
including Marlboro, Copenhagen, Skoal and Black & Mild
including Marlboro, Copenhagen, Skoal and Black & Mild
§ Generate annual
synergies of approximately $250 million by 2011
§ Be accretive to
Altria’s adjusted diluted earnings per share within
twelve months of closing
twelve months of closing
§ Enhance Altria’s
ability to generate an attractive total shareholder
return that is expected to exceed its 12% goal
return that is expected to exceed its 12% goal
§ Diversify Altria’s
revenues and operating income
Page 7
of 21
Altria’s
Acquisition Criteria
§ Fits with Altria’s
mission of owning and developing businesses
that responsibly provide superior branded products to adult
tobacco consumers
that responsibly provide superior branded products to adult
tobacco consumers
§ Enhances Altria’s
ability to increase revenues and earnings
growth rates over the long-term
growth rates over the long-term
§ Exceeds Altria’s
financial return hurdle rates
§ Utilizes and
complements Altria’s existing strengths and
infrastructure
infrastructure
§ Allows Altria to
leverage its strong and flexible balance sheet
Page 8
of 21
Tobacco
Category Dynamics
MST
Category Growth
(Can
Shipments -
Yearly ∆)
Tobacco
Companies’ Profit Pools
(2007
Estimates - in Billions)
Other
Mfrs
Source: NSDUH
2006 (Adult users), Maxwell Reports (April 2007), ACNielsen, Swedish Match 2007
Annual Report, Altria internal
estimates and *UST RAD-SVT 26weeks ended 6/14/08 per UST 2Q 2008 Press Release July 24, 2008
estimates and *UST RAD-SVT 26weeks ended 6/14/08 per UST 2Q 2008 Press Release July 24, 2008
Page 9
of 21
US
Smokeless Tobacco’s Operating Profile
§ Over 70% of
category’s pre-tax profit pool (1)
§ 56% adjusted
operating margins (2)
§ 58% share of the
MST category (3)
§ Copenhagen and
Skoal
have
a combined category share of
almost 50% (4)
almost 50% (4)
Source: (1) UST
internal estimates for 2007; (2)
UST Q4 2007 Press Release; Reconciliations of non-GAAP measures included in
this
presentation to most comparable GAAP measures are set forth on a subsequent slide and also are available on Altria’s and UST’s
respective websites at altria.com and ustinc.com; (3) UST Q2 2008 Press Release July 24, 2008; (4) UST internal estimates
presentation to most comparable GAAP measures are set forth on a subsequent slide and also are available on Altria’s and UST’s
respective websites at altria.com and ustinc.com; (3) UST Q2 2008 Press Release July 24, 2008; (4) UST internal estimates
Page
10 of 21
Page
11 of 21
Page12
of 21
USSTC’s
Brands Lead the Smokeless Category
Share
of MST Category
USSTC
Balance
of
Other Mfrs.
Other Mfrs.
USSTC’s
Brands
• Copenhagen
•
Skoal
•
Red Seal
•
Husky
Source: UST
Q2 Earnings Press Release July 24, 2008
Page
13 of 21
Altria’s
and UST’s Common Philosophies
§ Responsibly
marketing high quality premium-branded products
§ Investing in
brand-building equity programs
§ Developing
innovative new products
§ Reducing costs
through disciplined cost management
§ Addressing
societal concerns relevant to their respective
businesses
businesses
Page
14 of 21
Expected
Acquisition Benefits to UST
§ Combines
experience and knowledge in managing highly
profitable premium brands
profitable premium brands
§ Provides access to
more comprehensive infrastructure and
resources of Altria’s companies
resources of Altria’s companies
§ Enhances
efficiency and profitability
Page
15 of 21
Expected
Acquisition Benefits to Altria
§ Accretive to
Altria’s adjusted diluted earnings per share within
twelve months of closing
twelve months of closing
§ Generates an
attractive double-digit economic return
§ Grows and
diversifies Altria’s revenues and operating income
§ Leverages Altria’s
strong balance sheet
Page
16 of 21
Altria’s
Anticipated Cash Return to Shareholders
§ Modified
three-year (2008-2010) $4.0 billion share repurchase
program
program
– Spent $1.2 billion
purchasing shares in 2008
– Expect to resume
purchasing shares in 2009
§ Altria anticipates
a 75% dividend payout ratio post-transaction
– Current annualized
dividend rate of $1.28 per common share
Page
17of 21
Altria
& UST: Planning
and Approvals
§ Transition
planning by companies to occur over the coming
months
months
§ Transaction
subject to UST shareholder and customary
regulatory approvals which will be pursued promptly
regulatory approvals which will be pursued promptly
Page
18 of 21
Altria
& UST: A Compelling Transaction
§ Demonstrates
Altria’s commitment to deliver superior
shareholder return over the long-term
shareholder return over the long-term
§ Advances Altria’s
mission to own and develop businesses that
are leaders in responsibly providing adult tobacco consumers
with superior branded products
are leaders in responsibly providing adult tobacco consumers
with superior branded products
Page
19 of 21
Page
20 of 21
Regulation
G Disclosure
Reconciliation - Non-GAAP Financial Measures
Reconciliation - Non-GAAP Financial Measures
Source: UST Q4 2007
Press Release, reconciliation between GAAP and non-GAAP financial
measures.
Page
21 of 21
Employee
Communication
|
TO:
|
All
Employees
|
|
FROM:
|
Murray
S. Kessler, Chairman & CEO
|
|
DATE:
|
September
8, 2008
|
|
SUBJECT:
|
Altria
Group To Acquire UST
|
This
morning we issued a press release announcing that Altria Group and UST have
entered into a definitive agreement for Altria to acquire all outstanding shares
of UST. Altria Group is the parent company of Philip Morris USA and John
Middleton, a manufacturer of cigars. Although I know our company would still
have a bright future as an independent entity, I have come to realize
enthusiastically that UST will have an even brighter future as part of the
Altria family of companies. The main reason for this is that this transaction
provides additional resources that can and will be invested in our great brands,
which we very much believe will lead to faster growth and more value creation
than what we could have accomplished on our own. And, as part of a stronger
organization, it is also good for UST employees.
This
became apparent to me as I spent time with Altria’s Chairman and CEO, Mike
Szymanczyk, who clearly recognizes the importance of smokeless tobacco to
Altria’s well-publicized “adjacency strategy.” He understands that UST’s people
and brands are a terrific fit with that strategy. The combination of our
businesses brings together two dynamic industry leaders, both with an unwavering
commitment to brand building and strengthening their leadership position in
their respective categories.
This
is also true for wine. Mike recognizes and appreciates the strong growth
achieved by our wine business.
I
also can’t help but reflect on the fact that the $69.50 price being paid by
Altria, an almost 30% percent premium over the three-month average stock price,
is a true recognition of our people and our products. Back in 2000, UST’s
enterprise value was less than $4 billion, one third of the nearly $12 billion
value this transaction represents today. This value improvement is a reflection
of the collective hard work of all of our employees and their dedication to the
development of our brands. We should all be extremely proud of the outstanding
effort on behalf of our shareholders that has brought us to this point. I thank
each of you for your significant contribution to this unprecedented growth and
to this wonderful company.
Looking
ahead, our work building our great brands is far from over. During the next
several months, as we work to consummate the transaction, there are bound to be
distractions. However, what is critical is that each of us remains focused on
our job and continues our efforts to fulfill our visions and ensure the success
of our businesses.
While
the Altria-UST combination will enhance the opportunities for most employees,
for others this transaction presents uncertainty. In that regard, Mike has
assured me of his commitment to deal honestly and fairly with all of UST’s
employees, as I know he does with Altria’s employees.
Of
course you will have questions regarding the transaction and its potential
impact on your job. In an effort to communicate more directly about the
transaction, and to address some of your questions, I will be hosting a company-wide
conference call/webcast at 12:00 p.m. Eastern time today, which will
allow our associates on the west coast to also participate. At the end of my
remarks I will take your questions and answer them as fully as possible. But
please understand that I don’t have all of the answers just yet, and that
certain issues will become clearer as time passes.
To
join the webcast, please access the USToday or Vinelines portal and click on the
link under Urgent News on the home page. Those who do not have access to the
portal or would like to ask a question, please dial in at least 10 minutes prior
to the call to ensure access – (800)-299-9086, international 617-786-2903 and
enter the pass code – 5555.
Once
again, I thank each of you for your continued dedication to the success of UST
and look forward to your assistance in making this business combination a
success.
Frequently Asked Questions
About the UST and Altria Combination
Why was this decision
made?
The
Board of Directors, after considering all relevant factors, determined that the
transaction was in the best interests of shareholders. Having reached that
determination, the Board then authorized management to execute the necessary
agreement and take steps to combine the two companies.
When is the transaction
expected to be finalized?
A
number of steps, which are customary for transactions of this type, must be
undertaken before the transaction can be completed, including regulatory review
and approval by UST shareholders. While we don't expect it, there is always the
possibility that some pre-closing condition (such as regulatory clearance)
prevents the consummation of the transaction. Also, given the inherent
uncertainties associated with a regulatory review, the overall time it takes to
close the transaction is difficult to predict.
What will happen to my
job?
We
would expect that most positions will not be affected by the transaction.
However, there will necessarily be some consolidation, especially in the area of
corporate functions. Ultimately, staffing decisions will be up to Altria. In
this regard, Altria has assured us that any such consolidation will be effected
in a fair and equitable manner.
If I lose my job, how will I
be treated?
Like
UST, Altria is known for taking care of their employees and treating them
fairly, including any severed employees. Altria has agreed to afford severance
benefits which are similar to the generous package provided to employees
impacted by Project Momentum.
Why should I stay until the
transaction is completed and beyond?
We
hope that each of you remains as part of our team at this time. We have all
worked hard at growing this great company and we need your continued help in
ensuring that it is transitioned smoothly to Altria. For you personally, there
is the potential for a great career at Altria. Even if not, it might be in your
financial best interest to stay on. Language is included in the agreement aimed
at reducing uncertainty if your job were to change in a significant manner. For
example, if you are offered a job at Altria and you are required to relocate
more than 50 miles from your current location, you will be offered severance
benefits which are similar to the generous package provided to employees
impacted by Project Momentum.
What happens with my
benefits?
Altria
has a track record of providing generous benefits to its employees. During the
transition period, Altria has committed to providing benefits that are in the
aggregate at least equal to the current program through December 31, 2009. After
that, a new benefits program may be instituted and details will follow at that
time.
What happens with my
restricted share units?
The
agreement provides for the cash-out of all vested and unvested RSUs granted to
date once the transaction is finalized. More information regarding this will be
provided in the future as we get closer to a closing.
What will happen with my
stock options?
The
cash value of unexercised stock options will be distributed once the transaction
is completed, or with respect to certain older options, following shareholder
approval of the transaction. Of course, you can exercise your shares at any time
prior to completion of the transaction.
What happens with the shares
I currently own?
If
you are a shareholder, you will be receiving a proxy outlining the
details. Once the transaction is approved by shareholders and
completed, your shares will be cancelled and you will receive $69.50 per share.
If applicable, all outstanding company loans will need to be paid in
full.
Will the company’s Stamford
headquarters be relocated?
Any
decisions on consolidation of the operations at the Stamford headquarters will
ultimately be made by Altria, most likely after completion of the transaction.
In that regard, if a decision is eventually made to consolidate headquarters at
their Richmond, VA facility, those not given an opportunity or not willing to
relocate will be offered severance benefits which are similar to the generous
package provided to employees impacted by Project Momentum.
Important
Information
In
connection with the proposed acquisition, UST Inc. (“UST”) intends to file
relevant materials with the SEC, including a proxy statement on Schedule
14A. The proxy statement will be sent or given to UST’s
shareholders. Before making any voting or investment decision with
respect to the merger, UST’s investors and shareholders are urged to read the
proxy statement and all relevant documents filed with the SEC (when they become
available) because they will contain important information about the proposed
transaction. UST’s investors and shareholders will be able to obtain
the proxy statement and other relevant documents (when they become available),
and any other documents filed by UST with the SEC, through the website
maintained by the SEC at www.sec.gov. A free copy of the proxy
statement and other relevant documents, when they become available, also may be
obtained from UST Inc., 6 High Ridge Park, Building A, Stamford,
Connecticut 06905-1323, Attn: Investor
Relations. Investors and shareholders may access copies of the
documents filed with the SEC by UST on its website at
www.ustinc.com.
UST,
Altria Group, Inc. (“Altria”) and their respective directors and executive
officers may be deemed to be participants in the solicitation of proxies from
UST’s shareholders in connection with the merger. Information about
Altria’s directors and executive officers is set forth in Altria’s proxy
statement on Schedule 14A filed with the SEC on April 24, 2008 and Altria’s
Annual Report on Form 10-K filed on February 28, 2008. Information
about UST’s directors and executive officers is set forth in UST’s proxy
statement on Schedule 14A filed with the SEC on March 24, 2008 and UST’s Annual
Report on Form 10-K filed on February 22, 2008. Additional
information regarding the interests of the participants in the solicitation of
proxies in connection with the merger will be included in the proxy statement
that UST intends to file with the SEC.