Altria and UST: Timing Makes No Sense

Rumors are circulating that the "financial flexibility to respond to opportunites" Altria (MO)'s Louis Camilleri alluded to last week means that the company is going to acquire UST (UST). I am not so sure....

According to an article in Reuters:

The writing is on the wall, and has been on the wall for years, that this was the inevitable combination, said one consumer investment banker, who declined to be named. Altria has made no secret of its intentions for the smokeless market. But Altria had a lot of steps to make before they could make a move. Of course, in that time, UST's prize smokeless business has deteriorated some, the banker said.

All of the above is true, but, if Altria has had the acquisition in mind for years, why would they have spent millions developing and testing their own product? Wouldn't it just have made sense to make the purchase of UST before?

I do not believe any delay in a potential purchase had anything to do with the recently announced PMI spin. Both Phillip Morris USA (PMUSA) and Phillip Morris International (PMI) have made acquisitions during the past few years. As a matter of fact, as recently as last fall PMUSA announced they were buying cigar maker John Middleton.

Further, if UST is facing declining usage of it products (they are), then why make the move now? Altria's own smokeless products are virtually set to be rolled out nationally and based on the latest conference call, Camilleri was almost giddy over the results to date and the products potential.

Assuming Camilleri is not lying, wouldn't the prudent thing to do be to wait? Let your products further erode UST's smokeless business even more and then correspondingly watch the price you have to pay for UST to decline in tandem?

What if Camilleri's enthusiasm if warranted and Altria has a massive hit on its hand? They would in effect take a giant swath of business from UST and any price paid today, would look excessive down the road.

It isn't that a potential purchase of UST would be bad for Altria (it would be great), it is that the timing of doing it now just would not seem to make a whole lot of sense. It would seem that doing it a year or so ago or a year or two from now would be a far more economically sound decision.


Disclosure: Long MO.