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Original Title: Eskimo Pie

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company?

There are several methods that could be used to evaluate this company. Finding a

method that evaluates the stand-alone value is difficult. The stand-alone is the value

of the company in its present condition therefore the value should be dependent

upon the firm’s own assets and projected future income. This value determines the

company's valuation in relation to other companies in the same industry.

We decided to evaluate this company based upon two methods: The Discounted

Cash Flow Method and the Comparable Approach Method.

The greatest risk using Discounted Cash Flow Method is all the assumptions that

were made. Without knowing and having complete information this method could

report underestimated or overstatement figures. In the Comparable approach

Method the risk is that the value is subject to short-term fluctuations and assumes

all companies can generate the same growth.

Since the actual performance of Eskimo Pie in year 1991 was different from

Goldman’s forecast, our valuation will be based on both the Goldman’s forecast and

actual data with adjustments for comparison. Besides, since the deal lasted from

early 1991 to end of 1991, the valuations as at the beginning and at the end of year

1991 are presented for reference.

Based on Goldman’s forecast, the share value of Eskimo Pie was about $10.03 (at the

beginning of 1991) or $10.38 (at the end of 1991) as a stand-alone company. The

offer price $18.40 (i.e. $61million/3,316,000shares) by Nestle and the IPO proceeds

(i.e. $18.52-$20.52) were both higher than the share value as a stand-alone

company.

Based on actual performance of the company in 1991 and adjusted forecast, the

share value of Eskimo Pie was about $17.27 (at beginning of 1991) or $18.18 (at the

end of 1991). The offer price $18.4 by Nestle and the IPO proceeds (i.e.

$18.52-$20.52) were both higher than the share value as a stand-alone company.

Particularly, we used a WACC of 12.28% as the discounting factor, which could have

been lower by choosing a higher long-term risk-free rate and a higher risk premium

1

(currently we assume the market risk premium to be 7%). That is, the share value as

a stand-alone company could have been even lower under the DCF model. We

assume that, amortization and depreciation will be higher each year by the constant

growth rate (4%), because we assumed that the company is already fully operated

and will add more machine (shown in the increase of CAPEX-Capital Expenditure),

the depreciation and the amortization will be higher too. The Net Working Capital

will also increase in growing. And for the result, we estimate the value of the Eskimo

Pie as stand-alone company worth of $33,268 (in thousands).

To conclude, under the DCF model, the value of Eskimo Pie as a stand-alone

company is estimated to be lower than the offer price of the Nestlé’s buyout.

Please refer to Table 1 for detailed calculation and key assumptions made.

Based on Goldman’s forecast, the share value of Eskimo Pie was about $19.89 (at the

beginning of 1991) or $21.97 (at the end of 1991). The offer price $18.4 by Nestle

was below the share value. While the IPO proceeds ($18.52-$20.52) might overlap

with the share value if the IPO offer price reached the upper limit of $16.

Based on the actual performance of the company in 1991 and adjusted forecast, the

share value of Eskimo Pie Corporation was about $27.5 (at beginning of 1991) or

$30.25 (at the end of 1991). The offer price $18.4 by Nestle and the IPO proceeds

($18.52-$20.52) were both below the share value.

Please refer to Table 2 for detailed calculation and key assumptions made.

In 1980s, major food company entered the frozen novelties business. It made the

frozen novelties industry growth rapidly and competitive. After acquiring Carnation

in 1986 and Drumstick in 1991, Nestle entered the ice cream novelty market. Nestle

would like to expend its influence in the ice cream novelty market, so Nestle

considered to acquire Eskimo Pie. There were some reasons that make Eskimo Pie a

good investment:

(1) Licensing right

Top 10 licensees account for over 75% of revenues, and Carnation was Eskimo

Pie’s largest licensee and manufacturer.

(2) Brand name recognition

One or more Eskimo Pie brand products were found in 98% of all U.S. grocery

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stores, and Eskimo Pie is a 70 years old corporation.

(3) Manufacturing Plant and proprietary

Eskimo Pie had three plants, manufacturing the key ingredients and packaging

used by licensees.

(4) Product innovation

Eskimo Pie’s new product program was successful. For example, the new product,

Sugar Freedom Eskimo Pie, was largely responsible for the growth Eskimo Pie

unit market share from 2.3% in 1987 to 5.3% in 1991.

One of the potential synergies if Nestle acquires Eskimo Pie is that total cost of

running both businesses together will be lowered due to combination of

production facilities. For instance, employees in duplicate position in the product

line, distribution and marketing costs can be eliminated. Secondly, Eskimo Pie

had territorial licenses in the frozen novelty industry through national networks

of manufacturers. By acquiring Eskimo Pie, it means that Nestle will take over the

licensing and sublicensing business and therefore eliminates sublicensing costs.

The market share of the Eskimo pie shows The Eskimo pie should have the higher

value than which is estimated by Goldman Sachs. Article shows that the market

share is already 5.3%. Hence, the Eskimo pie will have a premium advantage. As

Exhibit 5 shows, the IPO market was promising and might generate more

liquidity and upward price potential to shareholders. Such liquidity and market

optimism might bring more value to shareholders as compared to a private

buyout. Furthermore, At $16 share, the firm and Reynolds obtained more from

the IPO than from the Nestle bid of $61 million. So that above would make

Eskimo Pie worth more to Nestlé than it was worth as a stand-along company.

proposed public offering?

6. Could you evaluate the public offering markets in Asia? Where would you

prefer to raise money for your company (if you have the authority!)? And why?

Table 1: Discounted Cash Flow Approach

a) Valuation based on Goldman’s forecast

Tax rate=40%

rf=4.64%

3

βU=1.15((assume equals mean of β U(comparable))

βE=1.17

Assume market risk premium = 7%

Assume r D=9.56% (corporate bond with BBB rating)

Assume market value of equity is the same as the book value

Assume free cash flow grow at 4% per year after 1993.

Assume capital expenditure is equal to average of capex in year 1989 and year 1990

Assume ΔNWC is equal to that of year 1990

Assume Depreciation and Amortization etc remains at the average of 1989 and 1990:

((1006+175+250-154)+(1352+118-58-156))/2 = 1267

Assume debt and cash amount at the end of year 1991 remains the same as at the end of year 1990

1991 1992 1993

NI $2,893 $3,195 $3,394

Plus Interest *(1-Tax Rate) $32 $23 $15

(Data from Exhinit 2 cash flow summary) $1,267 $1,267 $1,267

Minus CapEx $1,835 $1,835 $1,835

Minus ΔNWC $905 $905 $905

FCF $1,451 $1,745 $1,935

Terminal Value $23,862

WACC 12.28%

NPV at the beginning of year 1991 $1,291 $1,380 $18,150

Sum of NPV $20,821

Minus Debt $744

Plus Cash $13,191

Equity Value $33,268

No. of Shares 3316

Share value at beginning of year 1991 $10.03

Sum of NPV $21,958

Minus Debt $744

Plus Cash $13,191

Equity Value $34,405

No. of Shares 3316

4

Share value at the end of year 1991 $10.38

b) Valuation based on actual performance of year 1991 and adjustment

Adjustment on net income forecast and capex is made according actual outcome of year 1991

Base on the actual net income data, adjust the net income forcast in year 1992 and 1993. Assume

net income grow at 10% in year 1992 and 1993

Capital expenditure is expected to be about $1million since year 1992

Other assumptions remain unchanged

Year Ended December 31,

1991 1992 1993

NI $4,000 $4,400 $4,840

Plus Interest *(1-Tax Rate) $32 $23 $15

Minus CapEx $1,835 $1,000 $1,000

Minus ΔNWC $905 $905 $905

FCF $2,558 $3,785 $4,216

Terminal Value $51,988

WACC 12.43%

NPV at the beginning of year 1991 $2,275 $2,994 $39,543

Sum of NPV $44,812

Minus Debt $744

Plus Cash $13,191

Equity Value $57,259

No. of Shares 3316

Share value at beginning of year 1991 $17.27

5

Sum of NPV $47,826

Minus Debt $744

Plus Cash $13,191

Equity Value $60,273

No. of Shares 3316

Share value at the end of year 1991 $18.18

6

Table 2: Multiple Approach

Valuation based on Goldman Sachs Forecast

PE of Comparable companies 22.8x

EPS(year 1991) $0.87

Price at the beginning of year 1991 $19.89

EPS(year 1992) $0.96

Price at the end of year 1991 $21.97

PE of Comparable companies 22.8x

EPS(year 1991) $1.21

Price at the beginning of year 1991 $27.50

EPS(year 1992) $1.33

Price at the end of year 1991 $30.25

Market

Net Value of Total Levering Unlevered

Company Sales Income Equity Debt Beta Factor Beta P/E

Ben & Jerry's $97.0 $3.7 $110.1 $2.8 1.2 1.03 1.17 29.76

Dreyer's

Grand Ice

Cream $354.9 $15.9 $534.0 $44.3 1.4 1.08 1.29 33.58

Empire of

Carolina, Inc. $243.1 $8.8 $51.4 $89.8 0.3 2.75 0.11 5.84

Steve's

Homemade

Ice Cream $35.1 $1.8 $37.4 $3.1 2.5 1.08 2.31 20.78

Hershey

Foods Corp. $2,899.2 $219.5 $4,002.5 $282.9 1.0 1.07 0.93 18.23

Tootsie Roll

Inds. $207.9 $25.5 $728.8 $0.0 1.0 1.00 1.00 28.58

Average 1.14 22.80

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