The New York Times reports that Altria Group (NYSE: MO) "is in advanced talks to buy UST (NYSE: UST), the maker of the popular Skoal and Copenhagen smokeless tobacco brands, for more than $10 billion." Investors are reacting positively to the news, sending Altria shares over 1% higher. Since spinning off Philip Morris International (NYSE: PMI) in March, Altria expected to experience sales decline. U.S. cigarette industry has been on the decline for years and Phillip Morris USA indeed saw an adjusted 3.6% drop in sales last year. The company has projected the trend will continue and cigarette sales volume to fall between 2.5% to 3% in the U.S. over the next few years. The reasons are knows: concerns about health, smoking bans and price increases. Altria has tried and failed to create its Marlboro brand smokeless tobacco products and has also pulled the plug on Marlboro Ultra Smooth, which despite using better filters didn't see higher consumer acceptance.
Even before the spin-off, as Altria knew it was about to lose the Phillip Morris International growth, it has pledged "to enter the faster-growing, $3.7 billion market for snuff and snus, a finely ground tobacco placed in the mouth that doesn't require the user to spit, through product development and a possible acquisition."
The UST acquisition may be what Altria had in mind. And as many claim alcohol and tobacco always go together, UST indeed also owns Ste. Michelle Wine Estates, one of the 10 largest producers of premium wines in the United States.
The NYT says analysts have long been bullish on the deal, and from a pure investment point of view they may be right. But while smokeless tobacco use is still growing making investors and analysts excited, many forget the dangers of smokeless tobacco as it contains many carcinogens. Already it has been completely banned in Ireland, Hong Kong, New Zealand and Israel. The U.S. Surgeon General has warned about the use of smokeless tobacco and the law bans all advertising for smokeless tobacco on radio and television and requires a warning on packages. The House has already approved legislation that would allow the Food and Drug Administration to regulate tobacco products. The Senate may vote on it this fall.I guess this is sort of preaching to the choir as ethical investors are likely not touching the stock as it is. Investors who do just have to like the deal.