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The economic and environmental factors affecting USTs operations - Coursework Example

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This research aims to evaluate and present economic and other environmental factors affecting UST’s operations; primary business risks associated with UST’s business; impact of the capitalization process on profits and interest cover; reasons for leveraged recapitalization…
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The economic and environmental factors affecting USTs operations
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Download file to see previous pages The firm that is analyzed in the paper is UST Inc. UST Inc is involved in the manufacture of tobacco products which continue to be one of the oldest and most profitable industries. This fact has been borne out not only in the ratios but the fact that the company has been identified as the most profitable company in the United States by one of the most trusted sources – Forbes. The financial results speak to this fact. However, as in any industry there is competition and what has been happening is that even though the market is growing by 3.7% per annum UST has not been able to grow with it. This is due to the fact that the company has not been responding appropriately to the threats posed by its competitors. However, there are some environmental factors that have been affecting the company and so UST needs to answer these and other questions including:
• What environmental factors affect the operations of UST’s business?
• What business risks does the company face,
• Can the company undertake the recapitalisation process effectively?
• Why is UST considering recapitalisation and what would be the incremental effect on the company’s value?
• What other factors beyond interest rate shields should UST consider in assessing the value of its recapitalisation plan?
The environmental factors include political/legal, economic, and social issues. In addition to industry factors these affect every business and should therefore be given due consideration. In terms of the political/legal aspects the tobacco industry has been faced with tough regulations.

These have had a negative impact on the cigarette industry but much less on the moist smokeless tobacco. However, and restrictions have had a negative impact on the prospects for future growth in the industry. While being saddled with a $100 to $200 million over the next 10 years in payment as settlement in keeping with an agreement arrived at with Medicaid the company also face restrictions on its advertising and promotional campaign which is aimed at reducing the exposure of the youth population to tobacco products. Additionally, UST has a few litigations pending which is the nature of this industry. However, the smokeless tobacco industry has a much lower exposure to health related law-suits. The Medicaid settlement signifies a reduction in net income which cannot be recouped at this time when UST’s market share is declining. In terms of the economic issues although consumption has been increasing UST’s market share has been declining. The growth that has been experienced appears to be going to the company’s competitors. UST has a track record of growth and innovation but this has not been the case in recent times. The company is used to the practice of annual price increases – sometimes even twice per year but the competition will definitely prevent the company from doing so for most of its brands. This trend of increasing prices has been somewhat abated by the introduction of price-value brands by the company’s competitors. Although UST is large in comparison to its competitors and has a major share of the market the company has not responded the way that investors and analysts would like and so they are doubtful as to whether UST has not been able to respond in a timely and appropriate manner in order to regain its market share. Additionally, the resignation of the company’s chief financial officer (CFO) and the Director of Tobacco in 1997 is a signal to investors that something is fundamentally wrong on terms of both the companies manufacturing operations and its financial management which are two key areas. These are key persons within the company and who obviously would have impacted the company’s financial results. Like most other companies that are engaged in the production of goods the aim is to have products at each stage of the product lifecycle and to have products that will appeal to different groups. ...Download file to see next pagesRead More
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