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Altria Group Inc. Message Board

  • RJinCA RJinCA Jan 7, 2009 9:35 PM Flag

    How is acquisition of UST accretive to EPS???

    I am at a loss as to how UST helps Altria? They paid $11.7 billion which translates to about 4-5x revenue and a dividend yield rate of just over 5% for UST . But Altria, pre acquisition, trades at less than 1x revenue with a dividend yield just over 8%.

    Yes, they will save about a quarter of a billion per annum in the merger. But that does come close to closing the gap.

    It would be good if someone can tell me how this essentially translates in to a higher stock price for Altria? If you are so brave to tackle this one. I want to see how it allows for increased EPS and increased dividends per share for Altria.

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    • The simple end of it is this: smoking continues to decline domestically so it boils down to diversification of your products, i.e chewing tobacco. Thats the simple answer to the 64 billion dollar question. Altria cannot growth year over year just selling cigarettes. Period. Obviously the aquisition will add to EPS, how much is yet to be seen....

    • Prior to acquisition UST earned in the neighborhood of $3.80 per share vs. Altrias projected 2009 earnings of about $1.70. What will 2009 earnings projections be post acquisition? Given the fact that Altria share numbers have not increased, earnings per share should be significantly higher than pre acquisition projections.

      IMO Altria is a $60 stock selling for roughly $15 per share. We'll see.

    • Here is what I think. Short term (over the coming year), the UST buy will be slightly dilutive. After the first year, the UST purchase will be EPS positive. Here are my rationals.

      UST made about 500 millions in 2008. I think, with the massive marketing machine, MO should be able to make net earnings close to 600$ billiomns, after tax. MO borrowed about 10 billions at about 7-8% average. Interest for debt is before tax, and MO shouls be able to cut some overlaps and save perhaps 50-100 millions, for the first year. Therfore, for the first year, UST buy should be about neutral or slightly nagative.

      However, starting from year 2, we shall start to make money from the UST buy. First of all, I thik MO will start to unload some non-tabaco businesses so that they can cut down some debt. The biggest benefit from the UST buy is, with UST, it will make it much easier ti implement price increases across the board and across the industry. The fewer players in the field, the easier it is to push for price increaeses. If one looks at the US tabaco industry now, just two companies (MO and RAI) controls 90% of the market share, and essentially 99% of the premium market. There are not many industries in the US or in the world, that such a big and highly profitable industry is controlled by just two players! So, with UST under its belt, MO will realize value not just from smokless tobaco, but more importantly, relaize way more value from their Mabarol brands.

      True, by taking on UST, MO has to borrow quite some money. But, a total debt of debt that equals to about 2-3 years of net profit, this is a still a strong balance sheet.

      All considerred, the UST buy is a smart move, and MO at its current price is a strong buy, in my pinion. This saied, however, RAI looks to me even a better buy, since RAI has debt just 4billions, and yet they have 2,5 billions of cash.

      • 1 Reply to bwu106
      • BWU, TY for your analysis. I got a call back from investor relations (IR) today. They told me that when they made the acquisition back in September, they believed that this purchase would be accretive to EPS within 12 months. But the company, Altria, has backed off of that position, because the credit markets have since become rock hard. The IR rep said that she couldn’t tell me the company’s revised position on when they thought the acquisition would be accretive, since it is not yet public information.
        I asked how the deal was financed. To make a long story short, it is all debt financing -- $1.3 billion in assumed UST debt, $6 billion in long term financing raised in October @ 9.5%, $0.775 billion raised in December @ about 4.6%, and about $4 billion in short term bridge financing for the remainder (the interest rate for the bridge loan not provided to me). Yes, it is true that they are not issuing more shares of Altria stock. I am more inclined to believe the actual average cost of this capital is closer to 8.5% compared to the 7-8% you mention. The price tag for UST is $11.7 billion. At an average cost of 8.5%, we are at talking about $1 billion per annum in interest costs. You said that UST earns about $0.5 billion per annum. Well, that is an $0.5 billion shortfall. So that is the gap before this acquisition can be profitable. Supposedly they will save $250 million per annum in SGA once the merger is fully integrated. But still, they are $250 million short per annum before they are at breakeven. So, until they make up this per annum deficit -- either through growing the UST earnings and/or refinancing the debt when the credit markets mellow out -- this acquisition actually reduces earnings.
        I think this reality of dilutiveness will become more apparent as future EPS announcements and EPS forward guidance gets released. Based on what I have said, I think Altria will be in a weak position to increase the dividend in 2009 and even into 2010. I still think the dividend is safe, but you will likely not see increases in 2009 and 2010.

    • Then why did Altria purchase UST?

    • It looks like no one has thought this through or is willing to explain how the acquisition of UST is accretive to Altria shareholders in terms of price and dividend per Altria share.

      I will assume that the acquisition of UST is not accretive to shareholder until someone can cogently state otherwise.

      BTW, I have two calls into investor relations on this topic. And so far, they have not gotten back to me.

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