Eskimo Pie Case Study

CASE: ESKIMO PIE

In terms of the evaluation, your has to answer the following main question:

As an advisor to Reynolds, would you recommend the sale to Nestle or the proposed IPO?

I will suggest performing the sale to Nestle. The value of the offer is higher than the value estimated on DFCF and the alternative of an IPO has a level of uncertainty and unnecessary delay in obtaining the cash. Reynolds will be receiving a higher value than the business has a stand-alone business and will be capable of focusing on its core business.

First answer the following questions:

1. Without making any calculations, why do you think the managers of Eskimo Pie wants to find an alternative to the Nestle acquisition?

Managers want to find an alternative to Nestle because the acquisition of Nestle implies the disappearance of the company they work to build. Nestle will re-structure all Eskimo Pie management and probably in the future will try to integrate the production facilities with its current facilities. This action will affect management because they will be out of work. Also this action will have a significant impact in the community and the workers since the acquisition of an independent business by a large multinational normally carry future re-structuring decisions that will affect the community and the workers. The value for Nestle is in the Brand and the product development. Nestle will finalize all licensing agreements and will produce directly in their facilities taking advantages of its scale and distribution network. Eskimo Pie will be transformed in another product line of the whole Nestle portfolio.

2. Why is David Clark dealing with Wheat First Securities instead of Goldman Sachs? After all, as the case tells us, Goldman Sachs has a long standing relationship with Reynolds.

David Clark is trying to maintain the company as an independent company. Goldman Sachs was contracted by Reynolds the major stakeholder to find a buyer for Eskimo Pie in order to finance new investment in his core business. David Clark is acting on behalf of the board of Eskimo Pie trying to find alternatives that will allow Eskimo Pie remain independent while Reynolds obtain at least the same conditions offered by Nestle. In the case, the company is acquired by Nestle, the logical next step is that Nestle will buy all the remaining shares and will integrate the operation with its current management structure. Goldman Sachs cannot be approached since it is retained by Reynolds therefore it will be a conflict of interest if they also advice the management of Eskimo Pie.

3. Before looking at any of the numbers, why may the IPO be good alternative Eskimo Pie shareholders, why it may not be a good alternative?

The IPO might be a good alternative since it will be a reflection of the highest valuation of the market allowing also small investors to bid for a proportional part of the business. In addition, no conditions on the sale can be imposed by the acquirer as is the case with Neslte offer. From a market perspective it