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 ...view middle of the document...
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 to the apparent synergistic benefits (related to Drumstick), Nestle determined its purchase price of $61 million.
Reynolds Metals will benefit more financially by not selling to Nestle Foods. Both estimated stand-alone values are less then the purchase price, but Reynolds Metals will have to pay significantly high capital gains by selling to Nestle. Capital gain taxes will take a large sum of the cash. On the other hand, Nestle will benefit from the purchase because it will get a tax break from borrowing money to the purchase company and as mention above, buying Eskimo Pie will lower overhead cost by eliminating Eskimo Pie management and Nestle utilizing existing facilities and eliminating sublicensing costs creating greater cash flows.
Based on the projections, Eskimo Pie Company is expecting sales growth. It is undervalued compared to its industry average. Going through with the initial public offering will create higher market value of the company and generate enough cash to finance the IPO. In addition, the IPO will benefit senior management, employees, and the community. Reynolds Metals will receive upfront of 84% of $15 Million dollars of dividends and the value of the stock would increase because it will be valued based on the market. Wheat First will benefit as a banker that could provide additional debt needs to Eskimo Pie.
In conclusion, I recommend that Reynolds Metals chose the IPO option over selling the company to Nestle. The IPO will provide adequate financing, and keep the existing company intact. The Nestle purchase is a good value according the present value based on a future value, although the price is undervalued according to the Company Comparison Valuation Method. Nestle also has no intention of keeping the company intact.