Debt Policy at UST Inc Case Study Solution

Introduction

UST Inc. produces smokeless tobacco products, and it isconsidered as the leading producer in the tobacco industry. It is widely identified for its high dividend payout andtraditional debt policy, since it enteredin the marketin 1912. In December 1998; UST Inc.’s board of directorsdecided to acquire a$1 billion loan, for the period of five years in order to start its stock repurchase program. The stock repurchase program was approved in 1996, but in 1997 the program got suspended because of some unfavorable legislation issues that were being faced by the tobacco industry.

Problem Statement

Vincent Gierer, the CEO andthe Chairman of UST Inc., was considering the execution of the debt policy’s implementation plan, for which he had had discussions with his management team for having an analysis of the debt policy’s impact as well as therecapitalization’s effect.(Mitchell, 2001).

Situational Analysis

The Smokeless Tobacco Master Settlement Agreement was signed by the company in November 1998, in order to restart its stock repurchase program and resolve its liability issues. In December, 1998; UST Inc.’s board of directors made the decision of acquiring a $1 billion loan for five years’ time period, in order to initiatethe company’s stock repurchase program.

Potential Business Risks

UST Inc. produces smokeless tobacco products, and is considered as the leading producer in the tobacco industry. Although, as a leading producer; UST Inc. has faced a number of business risk, which are discussed below in detail:

  • The aggressive price increase strategyimposed a high risk for the business,because thecompetitors adopted a price cutting strategy as compared toUST Inc., which enabled them togenerate more revenues and boost their sales.
  • Over the past years, UST Inc. had enforced the growing trend of innovation process related to flavors and forms, successfully. Despite which, the company was widely criticized for not expanding or reducingits product’s lines, with the introduction of new as well as an innovative process.
  • The president and CFO of the company resigned in 1997 because to the differencesin the views ofsetting the company’sstrategic direction. This exposed the company to a massive threat of mismanagement.
  • The value players were also apotentialrisk for the company, and the company hadfailed to encounter these players on time, because of their already established brands.
  • The promotional and marketing strategies for the product’s advertisement were widely affected by the legal restrictions imposed on public advertising.
  • At the end of 1998, seven lawsuits were filed against UST Inc., because of litigation concerns.

The Smokeless Tobacco Master Settlement Agreement was signed by the company, in November 1998, in order to restart its stock repurchase program and resolve it liability issues- Medicaid lawsuit. For this, UST Inc., decided to pay $200 or $100 million for 10 subsequent years,with an inclusion of reducing the youth exposure and accepting the advertisement restrictions……………………………

 

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