Ust Inc. Debt Policy, case study, case analysis, smokeless tobacco company, tobacco products, price-value market share, price-value competitor, tobacco industry, leveraged recapitalization
UST Inc. is the dominating smokeless tobacco company in the market with over 75% of market share and 90% of sales coming from their tobacco products. Their declining market share poses a problem for the company. As a premium and leading brand, the company ignored lower priced competitors.
After losing 9% of their market share to price-value brands/competitors, they launched their own price-value brand named "Red Seal". This move was too late as they addressed the problem as insignificant early on. With declining market share, and pending litigations, health movements/reforms against tobacco, these aspects may negatively impact future cash flows and estimates. Even though smokeless tobacco is a much healthier alternative to cigarettes and has fewer litigation cases, UST Inc. has put most of its eggs in one basket by having over 90% of their sales come from their smokeless tobacco line.
[...] in 1998 by and slowdown the percentage decrease in total market share by as down in figure 10 below. Figure 10 This slowdown in market share loss is the company's attempt at regaining market share by their price-value marketing strategy. The downfall to this was the lower profit margins as the COGS is higher due to the marketing expenses shown in figure 11 below. Figure 11 Another recommendation is to acquire their largest price-value competitor which would be the Swisher Company. Swisher has the highest 7 Yr. [...]
[...] UST Inc. was so successful that the company beat Coca-Cola and Microsoft for most profitable company. Issues and Risks (Ranking from largest impact to smallest impact on the future growth of the company) Declining market share Internal differences in goals and direction of the company Pending health litigations Despite having a strong brand with dominating market share, there are many risks associated with UST Inc. As a credit analyst or potential bond holder, having 7 pending health related lawsuits and litigation cases can have an impact on future cash flows. [...]
[...] We can see net sales and profit increasing year over year. Figure 1 The company generates over 85% of sales from tobacco which can show an undiversifiable risk in their market. The weight of the company lies in the hands of the tobacco industry. In figure 2 below, we can see profits of over 95% in the tobacco section of their company. Figure 2 According to the Standard & Poor's corporate ratings in figure 3 on the next page, UST Inc. [...]
[...] Case Summary UST Inc. is the dominating smokeless tobacco company in the market with over 75% of market share and 90% of sales coming from their tobacco products. Their declining market share poses a problem for the company. As a premium and leading brand, the company ignored lower priced competitors. After losing of their market share to price-value brands/competitors, they launched their own price-value brand named “Red Seal”. This move was too late as they addressed the problem as insignificant early on. [...]
[...] while all other competitors gaining market share in figure 5 below. Figure 5 The company is not in good position to expand internationally due to smokeless tobacco and tobacco (in general) not being of popular use overseas. Recapitalization UST Inc. considering leveraged recapitalization after a long history of conservative debt policy can be attributed to using debt to increase interest tax shield, fund discounts and rebates to retain or gain market share, reduce capital costs, buy back shares, increase share value, and fight or defend against hostile takeovers. [...]
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