Ipo – Eskimo Pie Corporation
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Eskimo Pie Corporation
Introduction
Reynolds Metals is the majority owner of the ice scream company Eskimo Pie Corporation and has decided to sell this company. Nestle Foods provided the highest offer of $61 Million. Due to delays of the Nestlйs purchase, Reynolds Metals has take into consideration the IPO proposal of David Clark, president of Eskimo Pie Corporation, rather than selling the company to Nestle Foods (Case Study, 2001).
This analysis will identify the current value of the company at a stand-alone value and explain why Nestle Food would want to buy this company and the synergies involved for their reasoning. We will also discuss who will benefit if Reynolds Metals were to sell to Nestle or were to create an IPO. Finally we will provide a recommendation for Reynolds Metals that will be most beneficial to the company financial needs.
Stand-Alone Value
There are many valuation methods that could be used to evaluate this company. Finding a method that valuates the stand-alone value is difficult. The stand-alone value should be dependent upon the firms own assets and projected future income. We decided to evaluate this company based upon two methods: The Discounted Cash Flow Method and the Comparable Companies Method.
Discounted Cash Flow Method takes the forecast free cash flows during forecasted horizon. Then we estimate the cost of capital (weighted average cost of capital) and estimate continuing value (value after forecast horizon). The future value is discounted to the present value. We than add back cash ($13 Million) and non-current assets and deduct total debt. With the information provided several assumptions had to be made to obtain reasonable values (life period of 30-years, Capital expenditures not to exceed $1 million dollars, depreciation to stay constant at $1.15 Million and a discounted rate of 10%). Based on our analysis, the company has a stand-alone value of $51 Million at the end of fiscal year end 1990 with a net present value of cash flows of $33 million that does not include the cash and non-current assets a cash of and non-current assets.
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.
The second method we used to analyze the firms value was the Comparable Companies Method. As shown in Table 1, we used the historical figures as of 1990 and Goldmans Sachs Projections. With an average of 22.8 times the value, Eskimo Pie has a value of $57 million at the fiscal year end of 1990. The Comparable Companies Method is more accurate then the Discounted Cash Flow Method because assumptions are not being used and the companys value is compared to industry values. The risk of using this method is that the value is subject to short-term fluctuations and assumes all companies can generate the same growth.
Table 1
Other methods not considered are the Book Value Method and Economic Method. Book Value Method does not take in to consideration the market value of the company. Eskimo Pie true value is based on the name of the product and not the historical value of assets. Eskimo Pie generates high cash and does not need to invest in fixed assets to create growth.
Nestle Foods
The purpose of Nestlйs proposal of $61 Million is to consolidate its current operation Drumstick with Eskimo Pie operations. Buying Eskimo Pie will lower overhead cost by eliminating Eskimo Pie management, utilizing existing facilities, and eliminating sublicensing costs (Case Study, 2001).
The purchase price is larger then the both of our stand-alone analysis because Nestle Foods is most likely projecting the value at discounted rate based on combined cash flows from both Drumstick and Eskimo Pie operations. Nestle is valuing the company based on acquisition synergy (Case Study, 2001).
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. By creating a synergy value can creates a risk that the purchase price might be overstated because it tends to overestimate the magnitude of timing of synergistic cash flows while underestimating their associated risks. It may also inadequately evaluate an appropriate split of synergistic value between buyer and seller. The benefit of doing a synergy acquisition is that it can evaluate the sensitivity of their value to changes in both the timing of projected cash flows and the key variables affecting cash flow magnitude (Jaffe, Jeffrey; Ross, Stephen A.; and Westerfield, Randolph, 2001).
Example of synergy is when GM bought a foreign car automotive called Daewoo. Combining GM with Daewoo created a global synergy and allowed GM to enter a foreign market and be more profitable. Most of the profits are not expected for a few years down the road, however GM expects to take 26% of South Koreas market in the near future. Like all acquired synergies, only time after the acquisition will provide if the synergy value was benefit to the company (Unknown, 2002).