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Feldman: RJR needs UST
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August 16, 2000: 4:27 p.m. ET
Salomon analyst cites UST as a logical acquisition target for R.J. Reynolds
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NEW YORK (CNNfn) - Shares for UST Inc. soared more than 10 percent Wednesday after an analyst report named the country's largest distributor of snuff and chewing tobacco as a likely takeover target by R.J. Reynolds Tobacco Holdings Inc.
The most logical use of R.J. Reynolds' (RJR: Research, Estimates) expected cash inflow from its acquisition of Nabisco Group Holdings would be to buy UST (UST: Research, Estimates) at $28 per share, said Salomon Smith Barney tobacco analyst Martin Feldman in a report.
UST rose 1-7/8 to close at 19-15/16 on the New York Stock Exchange Wednesday while R.J. Reynolds gained 1-7/16 to 36.
Both RJR and UST declined to comment on the report.
 Following the acquisition of NGH (NGH: Research, Estimates), RJR can look forward to about $1.45 billion in cash added to its balance sheet.
"It would be imprudent for RJR to pay down any of its existing debt," Feldman wrote in the report. The company's strong cash flow position enables it to sustain greater debt levels, he said.
If RJR did buy UST it would assume a $1.5 billion loss related to UST's Conwood Co. litigation. On March 29, a Kentucky judge ordered UST to pay $350 million in damages to rival Conwood. In the suit, Conwood, a distant No. 2 to UST in the U.S. smokeless tobacco business, alleged that UST had maintained its dominant position through anticompetitive business practices.
Feldman pegged total costs of the UST acquisition at $5.7 billion while total debt may hit $6 billion.
The RJR board will likely use the cash for acquisitions. Buying UST at $28 per share, a 55 percent premium over the stock's current price, would value the company at about $4.5 billion.
If RJR failed to find a suitable acquisition target, RJ may elect to take the company private. However, Feldman believes that result would be unlikely.
Feldman said acquiring UST by Jan. 1, 2001, would boost Salomon's estimate of RJR's pro forma earnings per share in 2001 to $6.86 from current estimates of $4.08.
In late June, RJR agreed to buy Nabisco Holding Corp. (NA: Research, Estimates) parent Nabisco Group Holdings for $9.8 billion, following Philip Morris' (MO: Research, Estimates) acquisition of Nabisco. 
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R.J. Reynolds
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