Merger & Acquisition: Team Assignment

Solution Preview

Merger & Acquisition

This is part of a team assignment. This will be a report to the board of directors that identifies a synergistic acquisition candidate for your company. An acquisition of UST by Altria. The 2006 annual report for both companies are attached.

i. This report should clearly identify the following:
1) Your proposed acquisition terms
2) Price
3) Financing
4) Potential negotiation strategies
j. Supporting financial data should include the following:
1) Price/earnings ratios
2) Book value
3) Current market value
4) Liquidation
5) Diluted price per share
6) Capital Budgeting tools (NPV, IRR, Profitability index, payback - optional: Discounted Payback and Modified Internal Rate of Return)
k. Discuss the general risks inherent in an acquisition strategy.
l. Discuss the specific risks that should be included in the quantitative analysis. For example, what risk factors should be included in the discount rate (sometimes known as the hurdle rate, or required rate of return).

Altria's subsidiaries operate globally, with manufacturing and sales facilities in various locations around the world.

Competition and Economic Downturns: Each of the consumer products of it is subject to intense competition, changes in consumer preferences and local economic conditions. To be successful, they must continue to:
? Promote brand equity successfully;
? Anticipate and respond to new consumer trends;
? Develop new products and markets and to broaden brand portfolios in
? order to compete effectively with lower priced products;
? Improve productivity; and
? Respond effectively to changing prices for their raw materials.
? There are risks related to the environment, health hazards and technology changes.

(PMI) Philip Morris International part of Altria Group had many acquisitions in the previous years. During 2004, PMI purchased a tobacco business in Finland for a cost of approximately $42 million. Also, during 2004, PMI reached an agreement to acquire Coltabaco, the largest tobacco company in Colombia, with a 48% market share. PMI expects to close the transaction in the beginning of 2005, for approximately $310 million. During 2003, PMI purchased approximately 74.2% of a tobacco business in Serbia for a cost of approximately $486 million, and in 2004, PMI increased its ownership interest to 85.2%. During 2003, PMI also purchased 99% of a tobacco business in Greece for approximately $387 million and increased its ownership interest in its affiliate in Ecuador from less than 50% to approximately 98% for a cost of $70 million. In addition, during the third quarter of 2003, They increased the stake in Pakistan and made market entries in South Africa and Nigeria. They also announced an acquisition in Colombia that is expected to be completed in 2005. Since July 2002 they have held an economic interest in SABMiller, which now stands at 33.9%.
Another division of the group, Kraft (The food division) continues to transform its product portfolio through internal innovation, acquisitions and divestitures. Kraft's revenue increased significantly in 2004, while the acquisition of Veryfine Products Inc. and its Fruit20 brand of zero-calorie flavored water added a promising growth candidate to the North American portfolio. During 2002, Kraft acquired a snacks business in Turkey and a biscuits business in Australia

On, January 31 2007, the decision to spin off the Kraft's shares owned by Altria was taken. For each share of Altria common stock you hold on the record date, you will receive that number of shares equal to the total number of shares of Kraft Class A common stock to be distributed, divided by the total number of shares of Altria common stock outstanding on the record date. Altria estimates that the distribution ratio obtained using this formula will be approximately 0.7 of a Kraft share for each Altria share. This will help in greater focus on both the business and will help in improving returns to the shareholders.

Case of acquisition of UST

UST Inc. is a holding company for its principal subsidiaries U.S. Smokeless Tobacco Company and International Wine & Spirits Ltd. U.S. Smokeless Tobacco Company is a leading producer and marketer of moist smokeless tobacco products. On the other hand International Wine & Spirits Ltd., through its Ste. Michelle Wine Estates subsidiary, produces and markets a number of premium wines, including Chateau Ste. Michelle and Columbia Crest, as well as Domaine Ste. Michelle sparkling wine. The Company also is the exclusive distributor and marketer of Antinori wines in the United States.

Financial analysis of UST in case of Merger
I am giving you step by step instructions of doing financial analysis of the organization (UST)
Altria as an acquirer will have to consider both the financial and non-financial aspects so as to form a qualitative impression about a company. Some of the factors are

History of the company and line of business
Product portfolio's strength
Market Share
Top Management
Intrinsic Values like Patents and trademarks held
Foreign Collaboration, its need and availability ...