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Debt Policy At Ust Essay

817 words - 4 pages

DEBT POLICY AT UST Inc.
B.B.Chakrabarti IIMC

THE ISSUE
UST planning a major change in capital structure via a debt-financed stock repurchase program Dec 98 UST Board approved a plan to borrow $1 billion over 5 years

UST - BACKGROUND
      

175 year old company Dominant producer of moist smokeless tobacco Uninterrupted cash dividends since 1912 One of the most profitable American companies 5-year ROCE of 92.1% Increasing EPS and Share price P/E ratio = 13.8

SMOKELESS TOBACCO MARKET (1998)
 $2 bn in retail revenue  5 mn consumers of moist smokeless

tobacco  7 mn consumers of chewing tobacco  Moist smokeless tobacco fastest growing segment at 3.7% annual growth ...view middle of the document...

9 Return on Capital 30.6 AA 9.2 BBB 4.1

25.1 15.4 29.3

Long-term Debt/Capital 21.4 40.8

S & P Industrial Senior Debt Ratings Distribution - 1999
AAA AA A BBB BB B CCC D 1% 4% 13% 20% 24% 32% 4% 2%

UST – INCOME STATEMENT PROJECTION
Sales EBIT Interest PBT Taxes Net Income Net debt Int. Rate Int. Cover Debt rating Actual 98 1423.2 753.3 -2.2 755.5 287.6 467.9 0.0 Pro-forma 99 1494.2 5% growth 791.9 53% of sales 0.0 791.9 300.9 38% 491.0 0.0

UST – INCOME STATEMENT PROJECTION
Sales EBIT Interest PBT Taxes Net Income Net debt Int. Rate Int. Cover Debt rating Pro-for. 99 1494.2 791.9 64.7 727.2 276.3 450.9 1000.0 6.47% 12.2 AAA Pro-for. 99 1494.2 791.9 67.6 724.3 275.2 449.1 1000.0 6.76% 11.7 AA Pro-for. 99 1494.2 791.9 78.2 713.7 271.2 442.5 1000.0 7.82% 10.1 BBB

UST - VALUATION
PV Tax Shields Value of UST Net Debt Stock Price Shares Repurchased Shares Market Equity Debt/Market Equity Status Quo $1 bn Recap 380 6,469 6,849 0 1,000 34.875 36.924 27.08 185.5 158.4...

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