Eskimo Pie Case Study

Reynolds Metals, the majority owner, has decided to sell its ice cream company Eskimo Pie Corporation. Nestle Foods provided the highest offer of $61 Million. Due to delays in Nestle’s purchase, Reynolds Metals has taken other options into consideration, including the IPO proposal by Eskimo Pie Corporation President David Clark. This analysis will identify the current value of the company, explain why Nestle Food would want to buy this company, and the synergies involved for their reasoning. It will also discuss the benefits of each option, and provide a recommendation.

First, the discount rate, which is the required rate of investors for this type of investment, is found. In 1990, Eskimo Pie had long-term debt obligations of $744 thousand, and had $19.496 million in Stockholder’s equity. Therefore, there financing was composed from about 3.68% debt and 96.32% equity.

The stand-alone value of Eskimo Pie should depend on the firm’s assets and projected future income. There are a few methods to find the stand-alone value, which include the Discounted Cash Flow Method, the Comparable Companies Method, and the book value method. The book value method doesn’t take into consideration the market value of the company. The discounted cash flow method is risky because it is all based on assumptions since not enough information is provided. The Comparable Companies Method uses Goldman Sachs projections. With an average of 22.8 times the value, Eskimo pie has a value of $57 million at the end of year 1990.

Nestle’s proposal to buy Eskimo Pie intends for the two companies to get consolidated. They would be able to eliminate Eskimo Pie’s management and utilize existing equipment to cut down on overhead. The purchase price is larger than the stand-alone analysis price most likely due to Nestle evaluating the company based on acquisition synergy. By combining the company value on a stand-alone basis of future cash flow (non-synergistic buyer) with the cash flows related...