Eskimo Pie
Introduction
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.
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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.
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