Altria Group, Inc. Agrees to Acquire UST Inc.

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Altria Group, Inc. (NYSE:MO) Altria Group, Inc. Agrees to Acquire UST Inc. September 8, 2008 9:00 AM ET

Executives

Clifford B. Fleet - Altria Client Services, IR

Michael E. Szymanczyk - Chairman and CEO

Murray S. Kessler - Chairman and CEO, UST Inc.

Analysts

Christine Farkas - Merrill Lynch

Judy Hong - Goldman Sachs & Company, Inc.

Nik Modi - UBS

David Adelman - Morgan Stanley & Co. Inc.

Christopher Growe - Stifel Nicolaus

Ann Gurkin - Davenport

Erik Bloomquist - JPMorgan Securities Ltd. (NASDAQ:UK)

Thomas A. Russo - Gardner Russo & Gardner

Brad Dorfman - Reuters

Todd Duvic - Banc of America Securities

Andy Baker - Jefferies & Company

Andrew Kieley - Deutsche Bank

Operator

Good morning, and welcome to today's Altria Group and UST Conference Call. Today's call is scheduled to last about one hour, including remarks by Altria and UST's management, as well as the question-and-answer session. [Operator Instructions]. Media representatives will be able to ask questions following the conclusion of questions from the investment community.

I would now like to turn the call over to Mr. Cliff Fleet, Vice President of Investor Relations for Altria Client Services. Please go ahead, sir.

Clifford B. Fleet - Altria Client Services, Investor Relations

Good morning, and thank you for joining our call. This morning we will discuss the Altria agreement to acquire UST.

Our remarks contain forward-looking statements and projections of future results and I direct you to the Safe Harbor statement in this morning's press release to review of the various factors that could cause actual results to differ materially from projections.

I also encourage you to read other important information about the announcement in this morning's press release in the section titled other information. Please note, that in this mornings call, we will only be discussing the UST acquisition. Following today's remarks investors and media representatives will be able to ask questions about the announced agreement to acquire UST.

Now it gives me great pressure to introduce Mike Szymanczyk, Chairman and Chief Executive Officer of Altria Group, Inc.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Thank you, Cliff and good morning to everyone. This is a very exciting day for all of us, and I think as most of you know, we announced earlier today that Altria and UST have reached a definitive agreement for Altria to acquire all of the outstanding shares of UST for $69.50 per share in cash.

The transaction reflects an enterprise value of $11.7 billion for UST, including the assumption of approximately $1.3 billion of debt. This transaction is strategically compelling and financially attractive for several reasons. First, it creates a total tobacco platform with premier brands across multiple tobacco categories.

The acquisition of UST adds the number one and number two premium moist smokeless tobacco brands, Copenhagen and Skoal to the strong brand portfolio of Altria's tobacco operating companies. This portfolio currently includes powerful brands like Marlboro, and Black & Mild.

Second, it generates anticipated annual synergies of approximately $250 million by 2011 through reduced selling, general, and administrative and corporate expenses.

Third, it also is expected to be an accretive to Altria's adjusted diluted earnings per share within 12 months of closing. And it enhances Altria's ability to generate an attractive total shareholder return that is expected to exceed our 12% goal, while diversifying Altria's revenues and operating income.

Altria is a financially disciplined business in its approach to growth and the investment of its shareholders capital. Last year's acquisition of John Middleton Company in the growing machine made large cigar segment is an excellent example of that approach. We believe that the acquisition of UST and its iconic brands in the growing MST category represents another great opportunity for us.

Any significant acquisition that Altria pursues has to do several things. First, it has to fit with Altria's mission to own and develop financially disciplined businesses that are leaders in responsibly providing adult tobacco consumers with superior branded products.

Second, it needs to enhance Altria's ability to increase revenues and earnings growth rates over the long term.

And third, it has to exceed Altria's financial return hurdle rates. Fourth it has to utilize and complement Altria's existing strengths and infrastructure. And finally it needs to allow us to leverage our strong and flexible balance sheet.

The UST transaction squarely meets each one of these criteria. The acquisition will give Altria immediate national scale in the highly profitable MST category.

Over the past two years, MST industry volume has grown over 7% per year. After cigarettes, the MST category has the largest annual pretax tobacco profit pool, estimated at $1.1 billion.

UST subsidiary U.S Smokeless Tobacco Company is the leading MST producer and marketer. In 2007 U.S Smokeless Tobacco earned over 70% of the category's pretax profit pool. Its 56% adjusted operating margins are higher than those of other MST manufacturers and higher than PM USA's cigarette margins. The company has a 58% share of the MST category, and its two premium brands Copenhagen and Skoal have a combined share of almost 50%.

Upon completion of the acquisition Altria's operating companies will offer adult tobacco consumer's superior premium branded products in the cigarette, MST, and machine-made large cigar categories, which are the three largest and most profitable tobacco segments in the United States.

Altria is acquiring UST at a price that is attractive for both company's shareholders. At 12.1 times 2007 EBITDA, the purchase price represents a multiple within the range of those paid in recent tobacco acquisitions. We are excited about the strategic and financially attractive acquisition, as it will enhance our ability to deliver superior shareholder returns.

Now I would like to introduce Murray Kessler, UST's Chairman and Chief Executive Officer, who will discuss why this transaction benefits UST and its shareholders. Murray?

Murray S. Kessler - Chairman and Chief Executive Officer, UST Inc.

Thank you, Mike. Today is also a historic day for UST and its shareholders. UST's Board of Directors has unanimously approved the terms of the acquisition agreement.

Upon closing of the transaction, shareholders of UST will receive $69.50 per share in cash, which represents a 29% premium, based on UST's latest three-month average stock price.

I believe that Altria is paying a fair and attractive price to UST's shareholders and our Board will be recommending that our shareholders vote to approve this transaction. This combination will provide Altria with the largest and most profitable moist smokeless tobacco company in the world, which has great brands such as Copenhagen, Skoal, Red Seal and Husky. As you know, UST also has a great wine business, Ste. Michelle Wine Estates, which is the fastest growing top 10 winery in the United State s.

In addition to the great brands and physical assets, Altria will benefit from a talented, dedicated and knowledgeable group of employees that have tremendous expertise in the smokeless and wine categories. As we explored this deal, I was very impressed with how Altria and its operating companies managed their businesses and treat their employees.

Altria and UST share similar business philosophies and values. For example, both companies are focused on responsibly marketing high quality premium branded products, investing in brand building equity programs, developing innovative new products, reducing costs through disciplined cost management, and addressing societal concerns relevant to the respective businesses.

This transaction has other significant benefits. Brands in the portfolio will benefit from our combined experience and knowledge in managing highly profitable premium brands. UST smokeless tobacco business will be able to access the Altria family of companies more comprehensive infrastructure and resources. So Copenhagen and Skoal and our other brands can achieve the full potential of the category growth strategy we embarked on eight years ago, and both companies can reduce redundant costs and infrastructure to make them more efficient and profitable than could have occurred on a standalone basis, while at the same time adding value to consumers.

I realize that today's announcement is a major change for UST and our talented and dedicated employees. Based on my experience, I am confident that the UST organization will rise to the occasion, embrace the change, and make this transaction a success.

On a personal note, I look forward to working with Mike and his team to seamlessly integrate UST into the Altria organization and make this business combination a success.

And I'll now turn the call back over to Mike who will discuss other details of the transaction.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Thank you, Murray. Altria expects this acquisition to be accretive to Altria's adjusted diluted earnings per share within 12 months of the closing, and to generate an attractive double-digit economic return. Acquiring UST will grow and diversify Altria's operating income and net revenues.

For the first half of 2008 UST had reported operating income of $450 million. If Altria had owned UST since the beginning of 2008, Altria's first half of 2008 net revenues would have increased 10.3% to $10.4 billion. In addition UST is expected to contribute over $500 million in operating free cash flow per year.

The transaction also provides Altria with the opportunity to leverage its strong balance sheet. The company has obtained new bridge financing commitments totaling $7 billion from Goldman Sachs & Company and JPMorgan, which together with our existing credit facilities and cash will be more than sufficient to fund the transaction. Altria intends to access the public debt market to refinance a portion of its credit facilities to help Altria achieve the highest credit ratings on such refinancings, PM USA a wholly-owned subsidiary of Altria has issued guarantees for Altria's debt.

In conjunction with the acquisition, Altria has modified its two year $7.5 billion share repurchase program. The Board of Directors has approved a three year $4 billion program which runs from 2008 through 2010. Altria spent approximately $1.2 billion repurchasing 53.5 million shares of its stock in 2008, and the company expects to resume purchasing stock against this modified program in 2009.

Altria continues to be committed to returning cash to its shareholders through dividends. Altria anticipates maintaining a dividend payout ratio of approximately 75% post transaction. Payment of future dividends is at the sole discretion of the Altria's Board of Directors.

The integration is anticipated to generate approximately $250 million in annual synergies by 2011, primarily driven by reduced selling, general and administrative, and corporate expenses. Altria believes that these estimated synergies will enable the company to deliver increased shareholder and consumer value. These synergies would be in addition to Altria's previously announced goal to reduced costs by over $1 billion by 2011 off its 2006 cost base.

Until the deal closes, I cannot go into specifics of the integration or operating plans. But, Murray and I would be working together diligently over the coming months planning for a smooth transition in order to realize the full benefits of this transaction. Both companies have talented and dedicated employees who have a history of successfully managing complex and challenging organizational changes.

Following the completion of the transaction, Murray will be named Vice Chairman of Altria reporting directly to me. I am pleased that Murray has agreed to stay on board to oversee the UST integration and help complete the transition.

I also want to welcome the UST employees to the Altria family of companies. They will be joining a talented, high caliber organization with a very bright future. The transaction is subject to UST shareholder approval and customary regulatory approvals, which would be pursued promptly. Shareholders of UST will vote on the transaction at a special shareholder meeting that will be scheduled at a later date.

I conclude by saying that I believe that the agreement to acquire UST demonstrates our commitment to deliver superior shareholder return over the long-term and is compelling from a strategic and financial perspective. This deal advances Altria's mission to own and develop financially disciplined businesses that are leaders in responsibly providing adult tobacco consumers with superior branded products.

So thanks very much for listening. Murray and I would be happy to answer any questions that you might have at this point.

Question And Answer

Operator

Thank you. [Operator Instructions]. We will be taking questions from the investment community first, followed by questions from media representatives. We will compile the Q and A rooster. Your first question is from Christine Farkas from Merrill Lynch. Please go ahead.

Christine Farkas - Merrill Lynch

Thank you very much and congratulations Murray and Mike. I had a couple of questions if I could. First I just, I guess just a housekeeping if you can just confirm what your anticipated debt to EBITDA ratio might be on the completion of this deal and just talk about the investment grade ratings?

And then a question about what you might see as opportunities at retail, how could this larger stronger company now deal with retail and perhaps your lobby efforts in Washington. Thanks?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, good morning Christine, this is Mike. As to your first question, I think that what you will see is we'll about 1.9 in terms of ratio on debt-to-EBITDA, once we complete the transaction. I believe that Moody's and S&P are out with their credit rating right now. Moody's has set BAA1 with negative outlook, and S&P as I said BBB+ with a negative credit watch pending the completion of the transaction, but I think that we're pretty clear that this deal will be completed and we will maintain our goal of being investment grade. So I think we're pretty comfortable with were we are on that.

As to the particulars of what happens going forward, it's a bit early for us to get in conversations about that. I will say that there are very strong sales resources in both companies and there is both an opportunity there for synergy and for a better outcome for retailers in terms of how we service them, and so we'll be... as we get to closing, we will be working how do we take advantage of what we've got here to build shareholder value.

Christine Farkas - Merrill Lynch

And Mike your comments will have a lot to do with cost savings clearly. Would you anticipate opportunities at the top line as well?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

While I think that the objective here of this transaction is to allow us to have greater top line and bottom line growth. We are a company that's interested in having strong franchisees, but also maximizing the return that we get for our shareholders.

So one of the reasons why we find this attractive at this point in time is that we believe that if we add this to our portfolio that the aggregate of the businesses that we will own will allow us to create top line and bottom line growth for shareholders.

Christine Farkas - Merrill Lynch

Thank you very much.

Operator

Thank you. Your next question is from Judy Hong with Goldman Sachs. Please go ahead.

Judy Hong - Goldman Sachs & Company, Inc.

Thanks. Good morning, everyone. Mike, I was wondering if you could just share your view of the current price gap situation in smokeless, and whether when you indicate that this transaction could also enhance consumer value, whether that indicates your thinking in perhaps adjusting that price gap situation in smokeless.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Sure Judy, and good morning. What I think one of the things that's great about this kind of a transaction is it really is a consolidation and a consolidation provides a number of benefits to us. It... It does create synergies. It does create value that could not otherwise exist if you didn't put the two companies together.

When we have looked at UST's brands, particularly Copenhagen and Skoal, what we see are brands with very strong underlying dynamics, but they are exhibiting some share decline, which is an indication of a bit of a value equation problem. So as we look at the combination of the two companies what we see is the opportunity to take our long experience in dealing with that kind of an issue, as well as the value that's created by putting the two companies together to solve that and have brands that achieve our goal, modest share growth while maximizing the income return that we get for our investors.

So, we actually see that as something that we're very adept at dealing with and we have strong infrastructure actually that we can use to help manage that very effectively, I believe. So it's just one of the reasons why this transaction makes so much sense is when you put it all together, it does give you the opportunity to have very strong brand franchises, create some additional value for consumers and the net of that is going to be more value for our shareholders.

Judy Hong - Goldman Sachs & Company, Inc.

And do you have a sense of what the appropriate price gap might be in smokeless. I mean clearly in cigarettes you target 45%, is there any reason to think that smokeless would be any different?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, once again, we look at the total value equation here. We have a kind of complex formula that we use when we examine the value equation, and so ultimately how we go about improving the value equation on those brands, I think will unfold once we own the company. But I wouldn't look at it as simplistically... as simply a price gap issue, it's a value equation issue and I think we are petty comfortable that we will be able to deal with it successfully.

Judy Hong - Goldman Sachs & Company, Inc.

Okay. And then on the share buyback program Mike, the modified program is lower then your previous program. I am just wondering how you think about sort of longer term share buyback opportunity, specially in conjunction with thinking about now some of the assets like the wine business or you still have Altria [ph] just take at SABMiller and sort of balancing potentially monetizing those assets with share buyback opportunity?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Okay. Well just in terms of perspective; while we modified our share buyback program here a bit, in order to really complete this transaction and what we think is the best way at this point in time and the least complex way to do it. We are still committed to share buybacks for our shareholders. We think they play a role in a company that creates as much cash as this one does. And so we'll continue to be focused on ways to do that.

But on the near term we could not take the opportunity to add the top line and bottom line growth potential from a strong business like this to our portfolio businesses. So it seems like an excellent use of our balance sheet to go ahead and make the acquisition, make this modification and then continue to look at buybacks going forward into the future as an opportunity.

Relative to other assets, one you mentioned is the wine business, you know once we own the company, we will take a look at the wine business and will make a determination as to what's the best way to create value for shareholders relative to that. And SABMiller continues to be a strong platform on our balance sheet. Obviously, helping us maintain investment rate credit ratings as we go to a transaction like this performing well. And so we continue to be comfortable with it as an item that helps us have the balance sheet flexibility and strength. We think that is more important to maintain.

Judy Hong - Goldman Sachs & Company, Inc.

Okay. And then my last question your anticipated closing date of the transaction and then how do you think about the potential antitrust hurdle on this transaction?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Yes. Well, obviously the closing date is depended upon it meeting all customary regulatory requirements and receiving approval. I will tell you that it's a part of this transaction. We and UST have done a thorough examination of the regulatory requirements for this type of transaction and this one in particular and we believe that the transaction meets the requirements as to the specific timing of going through all of those approvals is a bit hard to predict that at this point in time. But we would hope that we get that accomplished as rapidly as possible and we will be moving forward to do that.

Judy Hong - Goldman Sachs & Company, Inc.

Okay. Thank you.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question is from Nik Modi with UBS. Please go ahead.

Nik Modi - UBS

Thanks. Good morning, guys.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Good morning.

Clifford B. Fleet - Altria Client Services, Investor Relations

Good morning, Nik.

Nik Modi - UBS

Just a couple of quick questions, Murray will you still be paying the upcoming dividends, I think it's supposed to go back to dividends in a couple of days there?

Murray S. Kessler - Chairman and Chief Executive Officer, UST Inc.

The merger agreement not only allows for that dividend to be paid, but until the transaction closes we will continue to pay dividends in a normal manner.

Nik Modi - UBS

Excellent. And then Mike, if you could just share your thoughts on the Marlboro MST test. Will you be pursuing a kind of dual branded strategy with the base UST Copenhagen, Skoal brand, as well as the continuing to try to test Marlboro in the category?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well the test for Marlboro in the smokeless business will continue as they are in place. And we continue I think to view Marlboro as having a role in the smokeless business gong forward into the future. So as to the particular brand strategies, I think those will unfold overtime. But we believe Marlboro has a role in the smokeless business and frankly this acquisition will add some benefits to the brand in terms of our ability to carry that forward in a financially disciplined way.

Nik Modi - UBS

And then just a last question. Mike, when you look at UST's business and you've done your due diligence, have you identified any best practices that UST uses or implements and how it can benefit your kind of base business in terms of processes or strategies or promotional tactics?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well I think that UST is a very well run business. I mean one of the thing that's attractive about this kind of a transaction is the company has strong management. It's been lead extraordinarily well by Murray, and it's in a very good position. But the value that's created... that we are going to get by putting them together is as I've articulated a few minutes ago is going to add to the ability of management to make more out of the company than it is today.

I think that in particular when you look at UST from our perspective as being a company that has virtually really no position in the smokeless business at this point. There is a lot for us to gain by this acquisition in that particular area, particularly in areas like managing a business with a short shelf life like Copenhagen. So they have extraordinary competencies in those areas, and others. So I think we'll get a lot of benefit.

Murray S. Kessler - Chairman and Chief Executive Officer, UST Inc.

And Mike if I just could add, I just add. As I think we're going to learn a lot about each other overtime, and find out strengths and weaknesses of each other. And they're world-class organizations on both sides and successful companies on both sides. So I think we'll learn a lot more about that as time goes on. But I really do believe what I said in my comments, that there is a remarkably similar culture, and value system and belief in brand building, and I think those efficiencies will play out overtime. It's really a great combination Nik.

Nik Modi - UBS

Yes, I agree. Congratulations to you guys.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question is from David Adelman with Morgan Stanley. Please go ahead.

David Adelman - Morgan Stanley & Co. Inc.

Good morning. Mike, I wanted to ask you several things. First, is it correct that under your ownership ongoing share loss and an ongoing mix shift towards private label or price value either with MST wouldn't be acceptable?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, I wouldn't describe it that way, David. What I would say is that we... we look at premium brands as brands that need to exhibit modest share growth. And so our goal will be on our two premium brands once they are acquired here Copenhagen and Skoal to achieve modest share growth.

David Adelman - Morgan Stanley & Co. Inc.

And can you frame for us what level of annual incremental investment you think that will require?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well I think it's a bit early for us to do that, but as I stated little bit ago, we've look at the value equation circumstance here, and I think we are pretty comfortable that we can deal successfully with it, and at the same time show a very strong performance from the business.

David Adelman - Morgan Stanley & Co. Inc.

Okay. Secondly, Mike can you talk generally about how you get to double-digit returns, because it looks like on next year's consensus forecast for UST, even if you got half of the synergies you still be at an ROIC of maybe 6%. So what gets you from there to double-digit?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, I think, once we have closed the deal David we'll be able to talk to you more specifically about our forecast going forward. Right now, I think it is a little premature for us to do that.

David Adelman - Morgan Stanley & Co. Inc.

Okay. Two other things Mike, one, are you going to subject UST's marketing to your self imposed restraint, as an example, you elect not to advertise in magazines, they do?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Yes, once again, once we get to the point that we have closed the deal we can talk about, how we're going to view managing the business going forward.

David Adelman - Morgan Stanley & Co. Inc.

Okay. And then lastly Mike, what's changed, because three months ago I got the sense that you were almost exclusively committed to an organic development approach in smokeless. Is it that you're not pleased with the performance of Marlboro? Is it that the accelerated rate of category decline in the cigarette segment has changed your thinking?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, David, we're still committed to an organic strategy related to Marlboro. And I view this separate on a part from that strategy. I think as we look at this since the spin and examine it, what we concluded was that if we could do a transaction, that acquired this business and added it to our portfolio of businesses, what we would do is take the aggregate circumstance that we're in to a position where we could really improve top line and bottom line operating growth. And that was something that we should do particularly... in that one of the issues we hear from investors is questions about the whole cigarette industry decline rate.

So it's really looking at a particular transaction, examining it financially, taking a look at what the net results of the combination produces in terms of value, and then seeing if you can do a deal that makes sense for your shareholders, and in the end after a lot of conversation, we believe that we've come to that point. And this is just a reasonable transaction for us to do that strengthens the company, creates more opportunity for top line and bottom line growth over a longer period of time than if we didn't do the transaction.

It doesn't remove the opportunity for a smokeless tobacco from an organic point of view using a cigarette brand from the opportunity list for us. That continues to be some thing that we'll work on.

David Adelman - Morgan Stanley & Co. Inc.

Thank you.

Operator

Thank you. Your next question is from Chris Growe with Stifel Nicolaus. Please go ahead.

Christopher Growe - Stifel Nicolaus

Hi, good morning.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Good morning.

Christopher Growe - Stifel Nicolaus

Hi,my first question for you is just a kind of come back to an earlier question in response Mike is that, should we read through your comments that you... in order from Marlboro, MST or even Marlboro Snus to really go ahead, you needed a better frame work, a better business position in that category to really move those products ahead.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, I wouldn't say that. I think that once again they're really two separate distinct issues. One of them is taking our brand Marlboro and beginning to position it in the smokers' category in some ways that are unique to it. And then the other is really looking at a business that when added to our portfolio of businesses actually improves our overall ability as our corporation to produce top line and bottom line growth, so both are opportunities for us. They are different opportunities.

There will be synergies that are created between the businesses they can facilitate growth in different areas of each business. But in the end I view this as a platform that adds some growth potential, because the category's is growing at a nice rate. It adds to our Middleton businesses growth platform and both of those then when weighted... on a weighted basis average then to our results in our cigarettes business, which actually is performing quite nicely for us. But we all know the cigarette business is an industry where we are showing a rate of decline versus growth in these other two areas.

When you put that all together you get a stronger platform to produce top line and bottom line growth. It's really that straight forward. It isn't really about Marlboro. It's about looking at the aggregate of businesses that we have and what they can produce.

Christopher Growe - Stifel Nicolaus

Okay, that makes sense. And my second question if I can, just relative to... you gave some criteria early on your remarks saying five criteria, you look at for acquisitions. And the first one was just that you look for businesses that are leading positions in their category. So obviously it really limits you here in terms of this category. So was this one of the few businesses you actually... the only investment [ph] you considered in the smokeless category or can you talk about why you need to have leading position in the businesses you pursue for acquisition.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well I think what we say is that we really like that leading brand positions, and so obviously UST meets that criteria. It has leading brands and that's because we are set up to run premium brands that are strong brands and to build on those platforms. So I won't comment on other opportunities, but I think that it's pretty obvious that this company has the leading brands in it and for us it meets that criteria.

Christopher Growe - Stifel Nicolaus

Okay. Thank you.

Operator

Thank you. Your next question is from Ann Gurkin with Davenport. Please go ahead.

Ann Gurkin - Davenport

Good morning.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Good morning.

Ann Gurkin - Davenport

Just want to return to the discussion on the premium segment, do you have the confidence that the premium prices can, could be maintained or does that level need to be reset. I mean, can you also comment on your long term perception of the growth for the domestic and local segment?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, relative to your first question Ann, I am not kind of get into the specific pricing, but once again I think that declines that we are seeing in the shares of these brands reflects that fact that there is some tweaking of the value equation and these should be accomplished. And again I think the combination of the synergy values that's created, as well as the infrastructure strength that we can bring to this business will allow us to make those tweaks and return those brands to some modest share growth. So I think that's the right position for us to take. What was your second question?

Ann Gurkin - Davenport

Your outlook for the...

Murray S. Kessler - Chairman and Chief Executive Officer, UST Inc.

Second question [ph] is, Ann is category growth. We continue as a company to forecast north of 5% to 6% category growth, and that's certainly not going to hurt by everything you've heard here this morning. It should ultimately as consumer value is benefited it should only be accretive to that over the long term. But our call right now would be the category continues to grow in that 5% to 6% range.

Ann Gurkin - Davenport

Great. And then Mike, I wonder if you could comment on the ability to leverage Altria's tremendous operating or manufacturing efficiencies to the production of the smokers products or are their synergies or opportunities which you can transfer your manufacturing expertise to smokeless?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well I think we are going to acquire some actually fine smokeless tobacco manufacturing facilities as a part of the transaction. Our facilities are cigarette manufacturing facilities. We do have some capacity that we are utilizing to test market, but we don't envision changing the manufacturing setup for UST. We expect that we will continue to have the facilities that we acquire to manufacture the product.

Ann Gurkin - Davenport

That's great. Thank you.

Operator

Thank you. Your next question is from Erik Bloomquist with JPMorgan. Please go ahead.

Erik Bloomquist - JPMorgan Securities Ltd. (UK)

Hi, good morning.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Good morning, Erik.

Erik Bloomquist - JPMorgan Securities Ltd. (UK)

One question with respect to the price cap issue, is it a fair implication from that, that the combined company will now be redoubling its efforts to change tax laws in order to close price gaps?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, we will examine that issue once we complete the transaction. Right now, I think the companies have a pretty similar view on taxes anyway, but I'm not going to comment on our overall strategy until the deal closes.

Murray S. Kessler - Chairman and Chief Executive Officer, UST Inc.

From UST's perspective in the interim, having a fair taxation methodology that removes the tax subsidy has been our top state lobbying priority and that remains unchanged.

Erik Bloomquist - JPMorgan Securities Ltd. (UK)

Okay. Thank you. And then secondly with respect to continuation of the Marlboro brand in smokeless, is it fair to think that perhaps the Marlboro featuring smokeless is more on the sleek side [ph] than in the traditional MST, or could you give us some thoughts around that?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, once again we think that the brand has the potential to offer a number of different value propositions to the consumer in the smokeless area. We have two in the marketplace right now. They're learning environments for us, we learned a lot and I think that as we go forward into the future, we will position Marlboro in adjacent smokeless products that we think make good sense for us. So I think to go beyond that would be disclosing competitively sensitive information. So I just strongly emphasize to you we think it has a place in the smokeless area, and we're going to be to be working to take advantage of that opportunity.

Erik Bloomquist - JPMorgan Securities Ltd. (UK)

And then lastly just a housekeeping question. What's the deal cost of financing or could you give us the bridge financing all-in costs?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

No I can't, not at this time.

Erik Bloomquist - JPMorgan Securities Ltd. (UK)

All right. Thank you.

Operator

Thank you. Your next question is from Thomas Russo with Gardner Russo & Gardner. Please go ahead.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Good morning, Tom.

Thomas A. Russo - Gardner Russo & Gardner

Good morning, and congratulations.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Thank you.

Thomas A. Russo - Gardner Russo & Gardner

Yes. And Mike you had mentioned the... the modified share repurchase. I'm not clear on what is underway there. Have you increased the amount but stretched out the duration?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

No, what we have done is we have gone from $7.5 billion program over two years to $4 billion program that is spread over three years, and that includes 2008 in both cases.

Thomas A. Russo - Gardner Russo & Gardner

Okay, great. Thank you for that. You also mentioned that the cost synergies that you expect to realize through UST independent of those that you continue to forecast for Altria independently. What are those numbers for you... yourself [ph] and how are you coming along with realizing those?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well that number that we have given has remained unchanged, Tom it was used in 2006... starting in 2007. It's a $1 billion. We're well on track on that. In fact I think our second quarter earnings reflected some real strength in that particular area.

Thomas A. Russo - Gardner Russo & Gardner

Thank you. And Mike the last point is, as you mentioned in passing that the acquisition might have some positive impacts on John Middleton. And I'm wondering what you might think about there?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well what I was really referring to, Tom is not so much direct impact on Middleton, but to say that the large manufactured cigar business is a growth business, and so is the MST business. And so when we take those two businesses and aggregate them with our cigarette business, what it does is improve our overall ability to reflect operating income top line and bottom line growth. Because if you reweigh it, what you see is that you have a combination of industries that are declining, when you look at the cigarette business as a part of that at a rate of 1%, 1.2% per year versus cigarette decline rate of 3% to 3.5% a year. So you add it all altogether, it puts us in much better position to use synergies and share growth, and revenue growth to create top line and bottom line results that are better than we can with just a cigarette business and we are just cigarette and the cigar business.

Thomas A. Russo - Gardner Russo & Gardner

Thank you. It's very helpful.

Operator

Thank you. Your next question is from John McMillan with Rod Abbott [ph]. Please go ahead.

Unidentified Analyst

Murray, I always knew this was in the toolbox, I guess. Mike it seems to me like you are not changing anything, earnings estimate, growth rates, you're saying the deal will be accretive, but you're not kind of giving numbers. Was this kind of in your plans when you made your targets a few months ago or why... why are you kind of not being more specific in terms of what this deal can add?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, no, the answer to your first question is it wasn't in our targets when we started. What we said here is that we believe going forward the results will be better than the 12% total shareholder return goal that we have set, and that we talked about when we went into the spin back in the end of March. And I think once the deal closes then we can start to be more specific about what we think the impact will be on our results. But, at this point I think, it's appropriate for us to simply say we think it's a positive transaction. We think it strengthens our ability to produce results, and we believe that we're firmly in the position to produce better than the 12% total shareholder return goal that we have set.

Unidentified Analyst

And just if I could ask Murray, I mean there is this feeling on this call that you would kind of run out of tools in your toolbox to keep the earnings stream going as the price gap was getting more and more difficult and the need for promotion was accelerating. Can you comment on that?

Murray S. Kessler - Chairman and Chief Executive Officer, UST Inc.

Yes, I don't agree with that at all, I think that...

Unidentified Analyst

Well that's been told what [ph] people... what people are saying today, I mean they are definitely the feeling like you just kind of ran out of tools and are doing this?

Murray S. Kessler - Chairman and Chief Executive Officer, UST Inc.

No, I think I have been very, very clear that over the past number of years that I viewed that we had to continue to deliver 10% on our own total shareholder return on a consistent sustainable basis, but I wasn't happy that we weren't growing as fast as the category, and that our goal was while delivering a consistent and sustainable return to continue to take the steps to grow and to increase the value and to ultimately and I think I have used the analogy of a dimmer switch instead of flipping a light switch to gain on that category growth, and I think we've done that nicely.

The net result of it is though that, that is a slow and steady pace. So where our company continues to grow, deliver consistent returns, reward shareholders and then take every other dollar that we would generate beyond that 10% total shareholder return, and reinvest for faster growth. When you model that out over the next three or four years and you compared that to the $69.50 price, the $69.50 price... we don't deliver the same return that we're delivering shareholders today. I ultimately work for the shareholders and the premium that has been offered within this deal and the positive outlook on growing as fast as the category to net this was the right decision, but I believe we would have continued to be very successful as an independent company, but this is the right deal for the shareholders now.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Hey, look I don't think there's any question that both of these companies are doing just fine. But there's also no question that when you put them together, the consolidation creates an extraordinary amount of value for consumers and for shareholders and that's why it's smart for us to do this. It's not that one isn't able to perform without the other. It's that when you put them together, you just create much more value than you can get when they're apart.

Unidentified Analyst

Thanks a lot.

Operator

Thank you. Your next question is from Tilo Ree [ph] with Credit Suisse. Please go ahead.

Unidentified Analyst

Good morning.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Good morning.

Unidentified Analyst

I want to get back to the pricing issue [ph] one last time, Mike when we met with you in May you've seemed to indicate that you thought $3 is about the right price for a can of premium MST. Does that assessment still hold?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, once again, I think that to get into the specifics about particular areas of the value equation isn't appropriate at this time but as I said before, I think the transaction creates lots of value and that it will be important for us to take some of that value and use it to adjust the value equation for the consumer and Copenhagen and Skoal sold at we can return those brands to some modest share growth. And we'll get into how we do that when it's time to go to the marketplace, but right now, we have to concentrate on getting the deal closed.

Unidentified Analyst

So you don't want to share with us yet how much of the expected synergies will go to shareholders and how much it will go to consumers?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

That was kind of a nice way of asking that though [ph].

Unidentified Analyst

Very good. And then does this mean that your adjacency strategy is pretty much complete now, now that you have large machine made cigars, that you have smokeless product. Is their anything else that you will be looking for?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, certainly I think there are opportunities to create new products in the adjacency area and that's an effort that we have going on in R&D, and I think UST has going on in their R&D operation as well. So no, I wouldn't suggest that it's the end of adjacency, I think that it's just that broadening of the platform from which adjacency can be pursued and that's what acquisition does for you when you are on an adjacency strategy. It just broadens the platform so that you can pursue and even in greater amount of adjacency activity going forward into the future.

Unidentified Analyst

Okay. And then one last question, with the acquisition you are also getting the wine business, which obviously doesn't really fit into a total tobacco model. What are your plans for the wine business?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, it's a great business; we would like to understand it a bit better and then ultimately we will make some decisions about how to get the best value out for shareholders. So right now we have no particular answer to that question and I want to understand it better.

Unidentified Analyst

All right, thanks a lot.

Operator

Thank you. We will now take question from media representatives. [Operator Instructions]. We will compile the Q&A roster. Your next question is from Brad Dorfman with Reuters. Please go ahead.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Hi, Brad.

Brad Dorfman - Reuters

Hi, how are you doing today?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Good.

Brad Dorfman - Reuters

Good. Obviously this deal or the potential of this deal has been banded about for years now it seems. Can you give some color on how long you've been talking to each other and how you finally came to this deal?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well, I will say that we have off and on examined this and some our other transactions, but really it was a few months ago after the spin-off of our international business was completed that I called Murray and we began to have some conversations on this subject. And that's been going on for several months, and I think we finally got to the point where we both felt that we could do an excellent transaction for both of our shareholders and that's led us to today.

Brad Dorfman - Reuters

So you've first talk specifically in March or was it before then--?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

No, it was after March, I think it was in May I think when we first spoke.

Brad Dorfman - Reuters

Okay. And one last attempt at the whole price value equation question, is it fair to say that consumers will eventually be paying less for Skoal and Copenhagen, and it's the matter of you haven't decided how to accomplish that and how much less?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

I think it's fair to say that the consumer value on Skoal and Copenhagen will be improved once we transmit this transaction and we are able to bring some of the value it creates to that.

Brad Dorfman - Reuters

And how do you improve that without them paying less per ounce or some way of putting it?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Nice try, but I have gone as far as I'm going to go on that.

Brad Dorfman - Reuters

Okay. Thank you.

Operator

Thank you. Your next question is from Todd Duvic with Banc of America Securities. Please go ahead.

Todd Duvic - Banc of America Securities

Yes, good morning. A couple of quick questions on the share buyback program. Could you clarify with respect to the $4 billion authorization, the $1.2 billion that you have already completed in 2008, does that count against that $4 billion or is the $4 billion in addition to that?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

No it's counted against it.

Todd Duvic - Banc of America Securities

Okay, all right. That's helpful and then with respect to the debt structure going forward. Can you tell us where you are looking to have short-term debt versus long-term debt, the composition you have, kind of a little less than 25% short-term or any structure along these lines?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well what I said was that we have obtained $7 billion in the bridge financing as a part of this transaction, and then we will go into the public debt market beyond that. I'm not going to be more specific at this point in time.

Todd Duvic - Banc of America Securities

Okay. And then just one final question with respect to the UST notes outstanding, does Altria plant do guarantee those notes?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

I don't... we are assuming their debt as a part of the transaction if that's what you mean. So when you look at $11.7 billion value on the transaction that includes the assumption of $1.3 billion in debt.

Todd Duvic - Banc of America Securities

Okay, that's helpful. Thank you very much.

Operator

Thank you. Your next question is from Mark Oppeur [ph] with Credit Suisse. Please go ahead.

Unidentified Analyst

Thank you. Just as a follow-up to that assumption question. Your view is that Moody's and S&P's that it's rarely [ph] used. Do you mean actually a legal assumption of the debt so that it becomes Altria debt?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

I don't know exactly what you mean and I am hesitating because I don't want to give an answer that's not complete, but I think as a part of this transaction, we are assuming that debt, so... to go beyond that we can get back to you on that.

Clifford B. Fleet - Altria Client Services, Investor Relations

I believe that the terms of our outstanding debt is probably be paid off and refinanced in debt. We can confirm and get back to you, but there are very specific rules and guidelines that are in our outstanding debt issuance and those will all be followed.

Unidentified Analyst

Okay, yes I would like to follow-up. Thank you.

Operator

Thank you. This conference will conclude at 10:00 a.m. Eastern Time. Your next question is from Andy Baker with Jefferies & Company.

Andy Baker - Jefferies & Company

Thank you. All my questions have been answered.

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Okay, great.

Operator

Thank you. Your next question is from Nick Cayano with Paulson [ph]. Please go ahead.

Unidentified Analyst

Good morning. I had a question regarding the merger deal which you filed. It would seem that according to the merger agreement that, there are instances in which Phillip Morris can terminate the transaction, and pay nothing. And then there seems to be an instance in which if Phillip Morris so chooses to, they could simply terminate the transaction by paying a $200 million fee. Is my understanding of that correct, it seemed a bit odd to me?

Michael E. Szymanczyk - Chairman and Chief Executive Officer

Well I think that the actually the merger agreements pretty straight forward, and I don't know that there's anything particularly unusual in that. I think that the point that the agreement really takes both sides and focuses them on consummating the deal and that's what we're trying to do in that merger agreement and it's to secure that kind of focus and to make sure that that happens. Relative to any particular clauses I will have to get out the agreement and go through that with you. But, I think that there shouldn't be any misunderstanding other than that we've entered into this agreement to complete this deal and believe we will.

Unidentified Analyst

All right.

Operator

Thank you. Your next question is from Jason Dall with AFE Advisors [ph]. Please go ahead.

Unidentified Analyst

Yes, thank you. My questions have been answered.

Operator

Thank you. And your final question is from Andrew Kieley with Deutsche Bank. Please go ahead.

Andrew Kieley - Deutsche Bank

Hi Mike and Murray. I had a potential FDA regulation. Can you talk about your comfort around long term treatment of smokeless in terms of things like flavored varieties of MST, ability to get reduced risk classification potentially and federal smokeless excise tax because you would think with this acquisition and implies a pretty high comfort level that you have? Thanks.

Clifford B. Fleet - Altria Client Services, Investor Relations

Well, I don't think any of our positions have changed, the house has voted on a bill and you know our company's positions. It happens at both Altria and UST have supported FDA legislation. This transaction changes none of the facts that the smokeless tobacco consumers and the role flavors play are completely different. Usage in smokeless tobacco is low and on a long-term decline, and so yes we continue to believe that the kind of language that's been written into the bill that we currently support would be maintained, and it's a bill that we support.

The reduced risk language is difficult to get through and everybody has written about that. But ultimately it's still UST's point of view that the only way you get there is with a set of rules and then working through those sets of rules and that the debate and the harm reduction debate itself is advanced to a point where beyond discussion without some kind of regulatory body where you could let the science go to work and test and whether its post market surveillance, whatever that might be, you need a framework to advance the issue in and we think ultimately in that debate and in a regimented process, smokeless will benefit. So, no I don't see any changes from this transaction on that regard.

Operator

Thank you. At this time, I would like to turn the floor back over to management for any closing comments.

Clifford B. Fleet - Altria Client Services, Investor Relations

We want to thank everyone who joined us today. If you have any follow-up questions please call Altria or UST's Investor Relations or Media Affairs department. Thank you very much.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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