Sept. 5 (Bloomberg) -- Altria Group Inc., the maker of Marlboro cigarettes, is in talks to buy UST Inc., the largest U.S. snuff producer, for more than $10 billion, people with knowledge of the negotiations said.

A bid that size would value UST at 26 percent more than yesterday's closing price. UST, which produces Skoal and Copenhagen smokeless tobacco, and Altria are in advanced discussions, and an announcement may come next week, said the people, who declined to be identified because the talks aren't public.

Acquiring UST would give Altria about 60 percent of U.S. shipments of snuff, a $3.7 billion industry that's growing about 7 percent a year. Altria expects cigarette consumption to decline 3.5 percent this year, forcing it to play catch-up to UST and Reynolds American Inc.'s Kodiak and Grizzly smokeless brands.

``An acquisition of UST should strengthen Altria's position in the total tobacco industry and help to offset an accelerated cigarette volume decline,'' Judy Hong, a Goldman Sachs Group Inc. analyst in New York, wrote today in a note to clients. She recommends buying Altria shares and has a neutral rating on UST.

UST jumped $13.55, or 25 percent, to $67.55 at 4:02 p.m. in New York Stock Exchange composite trading. It was the biggest increase since at least 1980. Altria gained 29 cents to $20.95. The potential offer was reported yesterday by the New York Times.

Bid Speculation

UST spokesman Tom Fitzgerald said yesterday that the company doesn't respond to merger speculation, which was fueled by Chief Executive Officer Murray Kessler's withdrawal from a Lehman Brothers Holdings Inc. conference in Boston. He declined to comment today.

Lorillard Inc., the manufacturer of Newport menthol cigarettes, may be the most likely next target as the U.S. tobacco industry consolidates.

Nik Modi, an analyst at UBS Securities LLC, and investor Matthew Kaufler said today a UST acquisition may force Reynolds American, the second-largest U.S. tobacco company, to bid for the Greensboro, North Carolina-based cigarette maker. Lorillard climbed 6.4 percent in New York trading.

The addition of Newport would help Reynolds overcome slumping shipments of its Kool and Salem menthol cigarettes, UBS said in June. At the time, UBS estimated Reynolds might pay as much as $107 a share, 44 percent higher than today's closing price of $74.09.

Lorillard spokeswoman Hannah Sloane and Reynolds spokesman Seth Moskowitz declined to comment.

One-Fifth Value

Before reports of the offer, UST had a market capitalization of $8 billion, about one-fifth the value of Altria.

A $10 billion bid would value UST at 18.5 times expected 2008 profit. Rival Swedish Match AB trades at a price-earnings ratio of 15.7.

David Sutton, a spokesman for Richmond, Virginia-based Altria, said the company won't comment on takeover speculation.

Altria spun off its Philip Morris International division earlier this year and now concentrates solely on the American market. Altria hired Centerview Partners LLP; Citigroup Inc.; Credit Suisse Group AG; Deutsche Bank AG; Goldman; JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. to advise it on the spinoff, according to data compiled by Bloomberg.

Share Drop

The tobacco company's shares have lost 8 percent since the company spun off its overseas division on March 28. The international unit contributed about two-thirds of Altria's $13.2 billion in operating profit last year. The company is now left to look for additional sales as health-conscious consumers smoke less or cut back as cigarette taxes rise.

Growth is ``likely to remain muted, given an accelerated volume decline and Altria's limited exposure to growing segments within the broader tobacco industry,'' Hong wrote on Aug. 25.

Hong, who recommends buying Altria shares, wrote in March that there's ``a decent likelihood'' that Altria will buy UST.

Altria has pledged to enter the market for snuff and snus, finely ground tobacco that doesn't require the user to spit, through product development or an acquisition. It's been testing sales of smokeless products in Atlanta, Dallas and Indianapolis.

Acquisitions have been the preferred means of entry to the smokeless market, which is dominated by UST's Skoal and Copenhagen. Reynolds American, the second-largest U.S. tobacco company, bought snuff maker Conwood Co. in 2006 and is selling Camel snus in New York and other cities.

Smokeless Growth

While the smokeless market is dwarfed by the $70 billion spent on cigarettes in the U.S. annually, it's expanding about 6 percent a year, according to UST. Reynolds American's snuff brands added $670 million, or 7.4 percent of revenue, last year.

Discounting by rivals hurt UST's second-quarter earnings, released in July. Net income declined less than 1 percent to $139.7 million, or 94 cents a share, the first drop in a year.

Swedish Match, Europe's largest maker of smokeless tobacco, boosted second-quarter revenue on U.S. sales of snuff under its Red Man chewing tobacco brand, Chief Executive Officer Lars Dahlgren told analysts July 18.

To contact the reporters on this story: Chris Burritt in Greensboro, North Carolina, at cburritt@bloomberg.net; Jonathan Keehner in New York jkeehner@bloomberg.net;

Last Updated: September 5, 2008 17:34 EDT