Marriott

Finance 1 Final exam — Eskimo pie exam

Tuesday, February 09, 2010

1. What is your estimate of the value of Esdkimo Pie Corporation as a stand-alone company?

I have estimated the stand alone value of the company at around $55m USD (see Exhibits 1 thru 3 for the detailed calculation and underlying assumptions). However this valuation is highly sensitive to the underlying assumptions, particularly around the growth of the market and control of advertising and G&A spend.

As Exhibit 4 indicates an extreme range for the standalone valuation is between $30 – 70m.

2. Why would Nestle want to acquire Eskimo Pie? Is Eskimo Pie worth more to Nestle than it is worth as a stand-alone company?

Nestle wants to acquire this company for three reasons:

1. The company has a product offering which appeals to Nestle, and which fits in with Nestle’s portfolio

2. Nestle can achieve direct synergies by integrating this company into their business.

3. Furthermore, over the longer term, by continuously consolidating this industry Nestle (and other larger players) will accrue indirect benefits form improved industry performance (e.g. less price wars, building global brands etc)

The most important synergies which Nestle can potentially achieve are:

• Tax – The case mentions that there are some tax synergies available to Nestle (perhaps through change in approach to depreciation re debt shield)

• Larger scale in Distribution and Advertising — This offers both direct (cost reduction) synergies and indirect risk reduction (=> cost of capital reduction) synergies. The direct synergies come from Nestle’s larger scale which would lower distribution and advertising costs. The reduction in the overall risk of this business (not the specific business risk, but the risk associated with this sector of ice crèmes) represents a further synergy for Nestle. Under the hands of a powerful player in the market, the growth of this business is less risky and...