On paper Altria Group’s estimated $11.7-billion deal to acquire UST Inc. is a deal for the ages that will meld its powerhouse Marlboro line with the immensely popular Skoal and Copenhagen smokeless tobacco brands.
The combination of Altria, parent company to Philip Morris USA, and UST, creates the premiere tobacco company in the U.S. with a far reach into all segments of the tobacco category. Just one year ago, Altria struck a deal to acquire John Middleton Inc., manufacturer of machine-made large cigars, including the Black & Mild brand, for $3 billion.
"This is clearly a coup for Altria and a natural fit for its Philip Morris brand. OTP is a growing and very profitable end of the tobacco business," said Jim Callahan, director of marketing, Geo. H. Green Oil in Fairburn, Ga., and president of Convenience Store Solutions consultants. "While Altria’s acquisition of UST surely changes that dynamic, it demonstrates that Philip Morris is not at all ready to slowly sink into the sunset during the decline in cigarette smoking,"
Under the agreement, UST, like Middleton, would become a wholly owned subsidiary of Altria, but would be sure to utilize Philip Morris’ muscle to penetrate store sets. Retailers took a conservative approach when evaluating the deal with almost all of them concerned about how the overall tobacco category will be marketed and merchandised going forward.
Fran Duskiewicz, senior executive vice president of Nice N Easy Grocery Shoppes in Canastota, N.Y., said his company has enjoyed a good relationship with UST during an era of unprecedented growth in smokeless. He hopes that relationship will continue.
"UST is a great company to do business with. They are very open and agreeable with retailers," Duskiewicz said. "Philip Morris’s relationship with retailers has been periodically challenging."
More importantly, OTP is a wide-open category with plenty of room for growth. "We don’t believe it has been maximized yet," Duskiewicz said. "UST has been a great partner in that growth. Will that change? Will there be a tendency to over-control the category, possibly limiting its upside? I hope not."
David Bishop, president of Balvor Inc. and a tobacco category specialist, said this deal will impact the retailer’s business in many ways, some of which retailers may not fully anticipate.
"In the near-term, most retailers are probably expecting to see more aggressive tactics to grow share for Copenhagen and Skoal that PMUSA has successfully employed with Marlboro, which could cause concern with retailers," Bishop said. "However, longer-term retailers should recognize that price gaps will likely narrow between premium and price-value segments as more states convert to a weight-based method for taxing smokeless products, which has been documented to accelerate volume across the entire category."
In both cases, Bishop added, "these tactics would drive stronger profit dollars for the retailer by growing and protecting the premium segment of the category, which typically enjoys higher penny profits."
While Philip Morris has made news with its acquisitions, analysts speculated that Swedish Match, the last independent smokeless tobacco company, may attract a bid from a cigarette maker in the near future. While cigarette smoking in the mature markets of Western Europe and the U.S. is declining, snuff consumption is rising in the U.S. Some analysts said a front-runner is Lorillard, the third-largest U.S. cigarette maker, which unlike some potential buyers already has a large U.S. distribution network.
Lorillard’s flagship brand, Newport, is the top-selling menthol-flavored cigarette in the United States, and it is currently test-marketing snuff products with Swedish Match. Other analysts say Swedish Match will be subject to bid speculation because of its relatively small size.