Reynolds Metals acquired ice-cream Eskimo Pie Corporation from Nelson in 1924. Reynolds Metals retained Goldman Sachs to sell Eskimo Pie, 6 bids have received. Nestle Foods offer the Reynolds Metals the highest bid at $61 Million. However, due to the long-standing relationship with Reynolds and without the complications and conditions that Nestle wanted to attach to its purchase agreement, Reynolds Metals has taken into consideration the IPO alternative proposed by Wheat First rather than acquiring by Nestle Foods. This report will estimate the value of Eskimo Pie Corporation as a stand-along company, discuss the reasons why would Nestle want to acquire Eskimo Pie Corporation and its potential synergies.
At the end of this report, we will provide recommendations on whether Reynolds Metals should sale to Nestle or propose initial public offering based on maximizing the company financial needs within foreseeable risks.
Value as a Stand-alone company
The value of Eskimo Pie Corporation as a stand-alone company should based on its own assets and projected future cash flow.
When we evaluate the company based on fundamental valuation, the future value is discounted to the present value. We assuming following: project life has 30 years, Capital expenditure not exceed $1 million, depreciation at $1.18 million per year [(1.006 + 1.352)/2=1.179, average of 1989 and 1990 depreciation, Exhibit 2] and discount rate at 10% (that is the sum of market risk premium MRP=7% and average inflation rate i=3%, g=3%+7%=10%). Based on above assumption, the company has a stand-alone value of $51 million at the end of 1991 fiscal year, adding the 13 million cash reserve that Eskimo Pie accumulated at the end of fiscal year 1991, the overall value for Eskimo Pie Corporation would be $64 million. However, this estimate method lacks of accuracy. The whole calculation is based on assumption, slightly misuse the date will cause the company under or overvalued easily. By using Comparable Company Analysis, we will have a better accuracy because assumptions are not being used and the worth of the company is based on whole Frozen Novelty Industry. Comparable Company Analysis can determine the value of a non-treaded company (for example, the Eskimo Pie Corporation in this case) based on the valuation of comparable public treaded companies (for example, the H.J. Heinz corporation and Unilever Corporation in this case). Based on Goldman Sachs’ estimation, the net sales of Eskimo Price would be 1.2 times 1990 sales, or about $57 million. I think this is a consecutive estimation and Eskimo Pie Corporation is slightly undervalued. The sales for Eskimo Pie Corporation from 1987 to 1990 are $31,769,000, $36,695,000, 46,709,000 and 47,198,000 respectively. (See the following chart)
It is clearly that Eskimo Pie able to growth a much fast phase. The average growth rate from 1987 to 1990 is at 16%, based on this rate, the net sales of Eskimo Pie would be 1.16 times 1990 sales, or about 54.6 million. While Eskimo Pie brand products were found in 98% of all U.S. Grocery Stores, and Eskimo Pie enjoyed one of the highest consumer brand name recognition levels in the industry. This has extensive implication in evaluating Eskimo Pie’s value. Personally I believe that gives the value estimate an extra 1% top up and this will bring the estimate sales to 1.26 times 1990 sales, or about $59.4 million. When we look at the market share for 1991 leading Frozen Novelty Brands, Eskimo Pie was on the top three. The market share for the top brands, Popsicle, Klondike, Eskimo Pie, Snickers and Weight Watchers are 7.6%, 5.4%, 5.3%, 4.8% and 4.3% respectively. (See the following chart)
Clearly, excellent market reputation and noticeable market share brings Eskimo Pie’s company value up, another 4% top up seems reasonable. Thus, Eskimo is worth 1.30 times 1990 sales, or about $61.4 million.
Cite this Eskimo Pie
Eskimo Pie. (2016, Nov 21). Retrieved from https://graduateway.com/eskimo-pie/