Altria & UST Could Face Antitrust Issues (MO, UST)

The merger chatter this morning has Altria Group Inc. (NYSE: MO) looking at UST Inc. (NYSE: UST) in a deal valued at $10 Billion or higher.  This could be a major score for Big Tobacco.  The Us cigarette leader could grab hold of the largest smokeless tobacco company.  Marlboro could add Skoal, Husky, Copenhagen, and other brands to its smokeless tobacco operations to become the leader in that sector as well. But that may also bring up antitrust issues and potential regulatory hurdles. 

The current administration has not really blocked any mergers over thelast eight years. Whether the 2009 to 2012 president ends up beingMcCain or Obama, it is very likely that the new administration’s regulatory appointees won’thit each merger application with the auto-approve stamp.  Altria is worth more than $40 Billion today and the post-story pop has the value of UST right around $10 Billion.  Even if dealsof this size or magnitude are approved they may take longer and comewith more conditions than the last eight years have seen.  Does thismean the deal would get blocked? No, likely not.  But merging twoleaders in field would face scrutiny not just on the federal level.You have top recall that Big Tobacco has settlements with individualstates who rely upon the companies for taxes that go years and yearsinto the future.

Another issue that may come up is that Altria would have to decide ifit wants to keep UST’s wine operations.  Altria already holds a 28.5% stake inSAB/Miller.  UST’s Ste. Michelle Wine Estates produces and marketspremium wines sold nationally through the Chateau Ste. Michelle,Columbia Crest, Snoqualmie and Stag’s Leap Wine Cellars wineries, aswell as sparkling wine sold under the Domaine Ste. Michelle label. Italso is the exclusive U.S. distributor of wines made by Italy’sMarchesi Antinori.  This would give Altria either another revenuestream it currently doesn’t have, or the company could decide to putthe unit up for sale to help finance a deal.

It appears that Wall Street likes the notion of this merger.  On a day where themarkets are down about 1% we see Altria shares are up 1% at $20.87 andUST shares are up almost 25% at $67.32.  If the companies do decide tomerge it would seem that they would ultimately be able to get the deal approved.After all, both presidential candidates are generally deemed as tobacco friendly.There would just likely be certain conditions upon the terms andforward pricing. 

Jon C. Ogg
September 5, 2008