Can cigarettes, snuff, and wine join forces to create a match made in heaven? Altria
Fine wine and snuff?
Just how does a company decide to combine fine wines with smokeless tobacco? UST's portfolio consists of the popular Skoal and Copenhagen tobacco brands, and it dipped its toe into the grape vineyards in 1974, when it purchased Washington state's largest winery. Now it's the maker of well-known wines including Columbia Crest, Chateau St. Michelle, and recently acquired Stag's Leap Wine Cellars. Surprisingly, this unusual combo isn't that bad of an idea, especially now that Americans are moving away from tobacco products. Wine represents a little less than 20% of total sales, but it remains the company's fastest-growing segment. In the second quarter, wine revenue grew almost 25%, contrasted with the 1.3% decline in the smokeless-tobacco segment.
Put out that cigarette
Smokers around the globe are puffing away, while the U.S. tobacco industry has been on a steady decline over the past several years. That trend led to Altria's global spin-off of Philip Morris International
Well, for starters, Altria has been working on its own smokeless tobacco product, so UST's decades of expertise will help Altria muscle its way further into this market. Merging together each company's mix of brands will not only strengthen and diversify Altria's tobacco portfolio but will also result in synergies that are expected to reach $250 million annually by 2011.
Altria also lengthens its lead over its primary competitor, Reynolds America
As for UST's wine list, it's questionable whether Altria will keep the segment around. Even though Altria could benefit from the segment's higher growth, selling the wine business to Constellation Brands
Altria + UST = profit growth?
Even though American smokers are racing to find the ashtrays, the smoking habit is pretty unlikely to go away completely. After all, Altria has been a cash-generating machine for decades, and its Marlboro brand is still the world's No. 1-selling cigarette.
Still, investors may be wary about the UST purchase. While the market soared yesterday on the Fannie Mae/Freddie Mac news, Altria's stock declined slightly. Altria paid quite a premium for UST, and it's questionable whether the company can fully achieve the cost synergies it's projecting.
The company is selling for less than 13 times this year's projected earnings from continuing operations, and that figure does seem reasonable, given Altria's dominance in the industry. But even though I think the move is good in terms of positioning Altria for U.S. tobacco-market dominance, the price of the transaction, combined with questions regarding what Altria will do with UST's wine business, sours things from my perspective.
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