Hbr - Eskimo Pie Case

1701 words 7 pages
Statement of Purpose: The purpose of this analysis is to determine if Reynolds Metals (“Reynolds”) should accept Nestlé’s offer of $61 million for its holdings of Eskimo Pie. The crux of the issue is whether or not the projected income from a proposed Initial Public Offering (“IPO”) by Wheat First Securities (“Wheat First”) is reasonable and will actually result in proceeds between $61 and $68 million to Reynolds, the Reynolds family and the Reynolds foundation, as projected. To get at this question, this paper will seek to value Eskimo Pie as a stand-alone company, if the IPO option is selected.

Discount Rate: The first task is to estimate the discount rate, or the rate that investors will require on this type of investment. In
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However, such high levels of growth seem unlikely, especially when you consider that capital expenditures are minimal.

However, I believe that the answer for Nestlé’s high bid lies elsewhere, and that their bid may even be too low. The first factor is the $61 million in sales that Eskimo Pie experienced in 1991. Using Goldman Sach’s own net sales multiplier of 1.2 means the sales price should be around $70-75 million.

There are several other reasons why Eskimo Pie would have more value to a company such as Nestlé than as a standalone company. The first is that Nestlé could slash operating expenses, such as the Richmond management, advertising expenses and selling expenses, which would increase the net profits and the free cash flows. They would also be able to reduce personnel and possibly consolidate the manufacturing components of each company.

Most importantly, however, is that the acquiring company would also assume ownership of Eskimo Pie’s patents on the sugar and fat substitutes. The sugar substitute was largely responsible for Eskimo Pie’s increased market share and is thus a very valuable asset. Nestlé would be able to use those patents on all of their products and potentially see their market share grow as Eskimo Pie’s did. These patents, along with Eskimo Pie’s name, may be the most valuable parts of Eskimo Pie.

Two strong mitigating factors remain that would keep