Debt Policy in Ust

After such a long history of conservative debt policy, UST is considering a leveraged recapitalization to enhance the firm's value. First, UST will benefit from the interest tax shield. This interest payment deduction will enhance the firm's initial value thus increasing the value of each share by distributing across a small number of outstanding shares.

Second, the leveraged recapitalization has less financial distress for two reasons. One the one hand, UST has a favorable S&P rating due primarily to the highly cash generative nature of tobacco industry. One the other hand, the overall moist smokeless tobacco market is expected to continue to grow and their steadily increasing prices provided a solid boost to earnings and the company's stock price.

Third, the leveraged recapitalization will help managers from investing underperforming operations and projects. Historically, UST has dallied modestly in operations outside of its core moist smokeless tobacco operations. Such investments in non-core operations of its wine business and cigars business have traditionally provided returns far below those of the moist smokeless tobacco business. (In 1998, UST's wine business and cigars business generated operating profit margins of 14.9% and 5.9% respectively compared to its tobacco operating profit margin of 57.9 %.).

When dealing with a tobacco company the main risk is that on government regulation. Since tobacco can cause multiple health issues new legislation has been placed over the years limiting not only the sale of tobacco but also the production. This is a major risk but UST deals with smokeless tobacco. The perception of smokeless tobacco being healthier than smoking and the restrictions on actual smoking has worked in UST's favor. The other risk is that of competition within the industry. UST had a major position in the smokeless tobacco industry but as years past more companies came out with similar products