“UST Inc” case study
The primary business risks associated with UST are as follows: First, legal challenges will cause litigation expenses, lawsuits expenses and settlement payments, which will decrease the operating income and cash flow and will increase the risks of debt default. From the industry level, the smokeless tobacco manufactures have faced less exposure to health related lawsuits than cigarette manufactures because the scientific evidence linking smokeless tobacco to cancer is less conclusive than those on cigarettes. In 1998, the tobacco industry experienced some developments in the legal arena which the industry viewed positively. It can be expected that litigation and legislation targeting the tobacco manufacturers will continue. The existing litigation-related settlement obligations of UST include: (1) a share of the $206 billion settlement; (2) $100-$200 million over the next 10 years. And UST also faces a pending dispute over antitrust violation. Second, the intensifying competition could affect the operating income and cash flow and will increase the risks of debt default. UST is threatened by value competitors who cut prices to compete. Despite the product introductions, renewed focus on marketing and promotion, UST has been losing market share continuously from 1993-1998. However, these risks are relatively low given the strong operational result of UST. As of 1998, in terms of the key financial ratios, such as EBIT interest coverage, EBITD interest coverage, Fund flow/total debt, Free operating cash flow/ total debt, return on capital, operating income/sales and total debt/capital, UST was far better than its peers. Even if we add the two major existing litigation-related settlement obligations of UST, UST’s liquidation should be still very good.
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