Altria Group Inc.’s (MO) purchase of UST Inc. (UST), the largest smokeless-tobacco maker, could spark a wave of consolidation in the domestic tobacco industry.Altria is the owner of Phillip Morris USA, maker of Marlboro cigarettes. It offered $69.50 per share in cash for UST, the maker of Skoal and Copenhagen brand snuff. Altria will also assume $1.3 billion in debt, bringing the total value of the deal to approximately $11.7 billion.

“The combination of Altria and UST creates the premier tobacco company in the United States with leading brands in cigarettes, smokeless tobacco and machine-made large cigars,” Michael E. Szymanczyk, Altria’s chairman and chief executive, said yesterday (Monday) in a statement.

It’s a smart move for Altria, which has had little success with its own Marlboro-branded smokeless tobacco products. Smokeless tobacco accounts for $3.7 billion in sales annually. It is the fastest growing segment of the tobacco industry.

UST manufactures the two most popular brands of smokeless tobacco for adult users. According to data from the U.S. Center for Disease Control, Skoal has a 28% market share and Copenhagen has a 22% share. Together, they make up half of the U.S. market.

Meanwhile, demand for cigarettes has been on the decline in the United States, dropping 3.5% this year. Higher state taxes have boosted the price of cigarettes and are taking a toll on demand.

“Altria is buying two tremendous brands in Skoal and Copenhagen, which it can drop quite profitably into its own distribution network,” Thomas Russo, who manages more than $3 billion at Gardner Russo & Gardner, told Bloomberg News.

Altria predicts the consolidation will generate an estimated $250 million in annual savings by 2011.

This deal mirrors a similar purchase by Altria’s chief rival, Reynolds American Inc. (RAI), which purchased the second-largest maker of smokeless tobacco, Conwood Sales Co. LLC for $3.5 billion in 2006.

Altria’s purchase of UST could put pressure on Reynolds to make a bid for Lorillard Inc. (LO), another major American tobacco company, The New York Times reported.

Investors “are sniffing out the next deal in tobacco,” Matthew Kaufler of Clover Capital Management in Rochester, New York told Bloomberg after rumors of Altria’s interest in UST were reported late last week. “I would expect Lorillard to be next.”

Source: Altria Group’s $11.4 Billion Purchase of UST Could Spark More Tobacco Takeovers