Una Inc., - Evaluate the various business risks from the standpoint of a bondholder and provide an overall assessment of the company risk

From the background details below and the Excel attachment:

1. Evaluate the various business risks from the standpoint of a bondholder and provide an overall assessment of the company risk.

2. Should Una undertake the recapitalization? How will it affect the ability of Una to pay uninterrupted dividends

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DEBT POLICY AT UNA INC.

In December 1998,Una Inc's board of directors approved a plan to borrow up to $1 billion over 5 years to accelerate its stock buyback program. For Una Inc the leading producer of smokeless tobacco products and a company widely known for its conservative debt policy and high dividend payout (uninterrupted cash dividends since 1912) this announcement generated considerable attention on Wall Street. Investors eagerly awaited the subsequent actions of Vincent Una's Chairman and CEO.

In 1997, Una had suspended its stock repurchase program, approved in 1996 because of legislative and legal issues confronting the tobacco industry. In November 1998, the company signed the Smokeless Tobacco Master Settlement Agreement resolving its potential state Medicaid liability and reinstated its repurchase program. Management believed that this agreement represented significant progress with respect to the legal and legislative matters confronting the company, permitting UNA to proceed with its business strategy and potential recapitalization.

The smokeless Tobacco Market.

In the US smokeless tobacco industry generated $2 Billion of retail revenue in 1998 with approximately 5 million consumers of moist smokeless tobacco and 7 million consumers of chewing tobacco including loose leaf, twist, plug and dry. Moist smokeless tobacco consumption approximated 50% of the total.
While decelerating recently, the USDA reported moist smokeless tobacco has been the fastest growing segment of the tobacco industry with volume increasing at 3,7% annual growth rate over the past 17 years compared with a 2% annual decline in cigarette volume over the same period.
AC Nielsen reported that moist snuff volume grew 2.9% in 1997 and 1.2% in 1998.
A number of factors contributed to the continued growth of the moist smokeless tobacco segment. The increased prevalence of smoking bans has led consumers to switch to smokeless tobacco to circumvent smoking restrictions. Consumers perceive that moist smokeless tobacco is less of a health risk than cigarettes. Smokeless tobacco is less expensive to use than cigarettes based upon an average per week usage measurement. Additionally, consumers have been shifting over time to moist smokeless tobacco from loose leaf chewing tobacco. While the consumer base remains primarily male ( 98%) smokeless tobacco use is no longer confined to the stereotypical blue collar or rural users as approximately 30% of users have attended some college. The overall moist smokeless tobacco market is expected to continue to grow at an annual rat of 1-3% with a large portion of the growth expected in the price-value segment.

Competitive position

Una inc is the dominant producer of moist smokeless tobacco or moist snuff, controlling 77% of the market.
Una Inc was a driving force in the overall expansion of smokeless tobacco market over the years, primarily through product innovations such as new forms and flavors. Historically Una has been aggressive with its price increases, instituting almost annual, often twice annual, price increases over the past 25 years. Steadily increasing prices provided a solid boost to earnings and the company's stock price. Meanwhile, as the company expanded the category and continued to raise prices, smaller players eroded Una's market share primarily by cutting price.

Given Una's relatively significant share erosion in recent years, the investment community called upon management to take actions to compete more effectively against the value brands and stem the erosion of market share. Despite its history of expanding the overall smokeless tobacco industry through new product introductions and innovations, Una has been criticized recently for a reduction in innovation and tardiness of new product introductions and product line extensions.
Inroads by smaller competitors, primarily in the value segment, led to missed earning and lowered Wall Street expectations. The CFO, two key executives and the President of the tobacco unit resigned due to "philosophical differences about strategic direction of the company".
Smokeless Tobacco Brands (1998 Dollar Share)

Copenhagen Fine Cut (UNA) 29.9%
Skoal Fine Cut Wintergreen (UNA) 11.8%
Kodiak Wintergreen (Conwood) 9.5%
Skoal Long Cut Wintergreen (UNA) 9.4%
Copenhagen Long Cut (UNA) 7.2%
Skoal Long Cut Straight (UNA) 5.9%
Skoal Long Cut Mint (UNA) 4.4%
Skoal Long Cut Cheery (UNA) 2.9%
Skoal Bandits Wintergreen (UNA) 2.2%
Skoal Long Cut Classic (UNA) 2.0%
Skoal Long Cut Spearmint (UNA) 1.8%
Skoal Fine Cut Straight (UNA) 1.3%

In 1997, rather than cut prices to counter growth of value players, Una introduced its Red Seal brand tobacco to compete with the price-value brands and preserve pricing power and profitability of its premium brands. Despite this new product, analysts felt that Una was too slow in responding to the threat of value competitors. At the time of the introduction, the value segment had gained 9% market share, requiring Red Seal to compete against already successful value brands.
Another 1997 product introduction, Copenhagen Long Cut was introduced to combat Conwood's full-priced Kodiak brand. Conwood through its promotion of "long cut" brands which are easier to use than fine cut products, had made strong inroads with young and new consumers.
Una originally stood by its traditional Copenhagen Fine Cut, only succumbing to the pressure to introduce a competitive product after continuing market share losses. Rooster, introduce in 1998, was a new premium product packaged in a larger can, 1.5 ounce compared to the traditional 1.2 ounce, to provide more tobacco for the consumers' money.

In addition to product introductions, UNA renewed its focus on marketing and promotion.
Due to restrictions on public advertising, UST focused its marketing expenditures on free samples, mail-in rebates and promotional sales. In 1997 and 1998 the company implemented a number of marketing initiatives and promotions. For example the company offered 4-for-3 pricing on selected products, increased couponing, expanded its sales force, provided retailer and wholesaler incentive programs, expanded outlets and / or markets for new products, executed selected per can discounts used special commemorative lids and repositioned certain Skoal products.

Litigation and Legislative Environment

Smokeless tobacco manufacturers have historically faced less exposure to health related lawsuits than cigarette manufacturers. Una had seven pending health related lawsuits (excluding the state Medicaid cases) at the end of 1998, compared to cases numbering in the hundreds filed against cigarette companies. This is due to the fact that scientific evidence linking smokeless tobacco to cancer is less conclusive than studies researching cigarettes tie to cancer, and snuff producers face no potential "second hand" smoke litigation.

In 1998 the tobacco industry experienced a number of developments in the legal and political arena, most of which were viewed positively by the industry.
In addition the tobacco industry agreed in November 1998 to settle state Medicaid lawsuits with a 206 billion settlement and a ban on advertising and promotions that appeal to youths.
Una had to pay $100 to $200 million or $0.15 to $0.2 per can over 10 years and agree to advertising and promotion restrictions. Una was the only major smokeless tobacco manufacturer to sign this agreement.

Despite the major Medicaid state settlement, lawmakers are expected to continue to push for new laws to combat youth tobacco use, further restrict advertising and empower FDA to regulate nicotine as a drug. Other litigation against tobacco companies is expected to continue especially suits filed by individuals.
Una also faced a pending dispute at the end of 1998 whereby Conwood alleged that Una had violated antitrust and advertising laws and participated in anticompetitive conduct.

Financial results.

Una has historically been one of the most profitable companies in corporate America. Una's five-year return on capital of 92.1% was nearly 20% higher than the 2nd ranked firm. In a profitability study Una was found the most profitable company as measured by return on equity, return on assets, and gross profit margin.
Una's profitability stems from many factors including its commanding share of the moist smokeless tobacco market, the strong brand recognition, the historical pricing flexibility and limited market access by new competitors due to tobacco advertising restrictions.

In the period from 1988 to 1998, other than decreases in earnings and cash flow in 1997, Una posted continuous increases in sales, earnings and cash flow over the entire period. Sales earnings and cash flow have grown at 10-year compound annual growth rates of 9% 11% and 12% respectively. Una maintained enviable margins with average gross profit, EBITDA, EBIT, and net margins of 77% , 53% 50% and 31% respectively. Annual return on equity averaged 89% and return on assets averaged 48%.
Over this period, Una provided a generous return of capital to investors, paying $2.2 billion in dividends and repurchasing $2.0 billion in stock.
While the vast majority of Una's operations evolved around the production of smokeless tobacco products, the company also produces and markets wine and premium cigars.
Wine and other businesses (cigars) contributed 10% and 2% of revenues, and 3% and 0% of operating profit respectively.

The tobacco Industry

Una's 1998 financial performance relative to other tobacco companies is favorable. Una's gross profit margin of 80% compares to a median of 28% of other companies.
Average return on assets of 54% and return on equity of 103% for Una compares to medians of 3.1% and 22.5% for other companies.
Una achieves these high returns with low financial leverage. Una's total debt to book capitalization is 17.6% compared to the median of other companies of nearly 66%.
Standard & Poor's (S&P) rates the debt of three of the six other tobacco companies as investment grade and two companies are rated BB, the highest level of speculative grade credit ratings.
The favorable ratings are due primarily to the highly cash generative nature of the tobacco industry. S&P views the near term outlook of the tobacco industry to be stable and the longer term view to be less clear. Despite the strong cash flows, the US tobacco industry is characterized by legal challenges, declining volumes, marketing restrictions, taxes, discounting and consolidation.

Una has historically maintained an A-1 credit rating. As Una increases its debt level, it will likely issue long term debt, thereby increasing the average maturity of debt outstanding. S&P and other rating agencies will review Una's overall corporate profile, proforma capital structure and investments intentions to determine the appropriate senior debt rating for the company. The rating determination will have a significant impact on the cost of the recapitalization.

Outlook

Once a Wall Street darling, research analysts in late 1998 have mixed views of Una's future, with a number of analysts maintaining Neutral ratings on the company.
While Una has stabilized its market share, analysts remain concerned about the continued threat of price value competitors and a softening smokeless tobacco market.
Unlike cigarette companies who combat declining domestic consumption trends with offshore growth, Una has no immediate opportunity for International expansion. Historically lackluster performance of non core operations creates some concern that management might use funds to over invest in under-performing businesses.
Additionally public and political sentiment remains negative regarding the tobacco industry.

Despite the less than glowing outlook, the board of directors decided to borrow up to $1 billion to accelerate the company's stock repurchase program. Looking forward to 1999, the Una management face the task of implementing the major change in debt policy.