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Eskimo Pie Case Study

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Eskimo Pie Case

Stand-Alone Value:
Reynolds Metals is considering the sale of Eskimo pie, a company they have an 84% stake in. In order to come up with an asking price, the stand-alone value of Eskimo Pie needs to be estimated. This calculation can be done a number of ways, but in this instance the Discounted Cash Flow method will be used.

In order to utilize this method, the Weighted Average Cost of Capital (WACC) has to be calculated. Based on the financial reports, the WACC is estimated to be 12%. In addition, the horizon value of the company must also be calculated. The capital expenditures, depreciation, and working capital are not very significant in this calculation. The $13 million in generated cash needs to be added to the discounted cash flows. The final stand-alone value of Eskimo Pie is estimated to be $55 million.

Nestlé’s Acquisition:
Eskimo Pie is a successful frozen novelty producer. Nestle Foods produces similar products as Eskimo Pie. In the past Nestle had acquired Drumsticks and Carnation, two popular frozen dessert products. Its familiarity with Eskimo Pie would make it an easy target for acquisition.

An acquisition of Eskimo Pie could create potential synergies. Because Nestle already owns the manufacturing and distribution capabilities, they could be used for Eskimo Pie. Consolidating their production would allow them to eliminate extraneous costs. Nestle could also eliminate the current management and other employees. Lastly, the sublicensing costs of Eskimo Pie could also be removed.

Eskimo Pie would be worth more to Nestle than its worth as a standalone company. Nestle Foods took synergistic cash flow into account when discounting future value. Although in this case, Nestle has to count on the accuracy of timing of future cash flows.

Proposal:
It would be in Reynolds’s best interest to sell Eskimo Pie to Nestle

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