Skimo Pie

-------------------------------------------------
Case Analysis
Prepared for: Ann Marie Klingenhagen
Prepared by: Sophie GRANCIER, Leila JIRARI, Risa KOBAYASHI,
Diana PHAM, Moon Jung SON, Mercedes TAUS
Date: December 7, 2011
-------------------------------------------------
Proposal #: Business Valuation

Table of Contents
1.0 Our Understanding of the Situation 1
2.0 Assumptions1
2.1 Identification of Comparable Companies 1
3.0 Analysis and Results 1
3.1 Discounted Cash Flow Method 1
3.2 Relative Valuation Multiples 2
5.0 Recommendations 2
Appendix 1: Assumptions 3
Appendix 2: Adjusted – Projected Income Statements 4
Appendix 3: Weighted Average Cost of Capital and Capital Asset Pricing Model 5
Appendix 4: Free Cash Flow and Discounted Cash Flow Method6
Appendix 5: Relative Valuation Multiples 7

1.0 Our Understanding of the Situation
Current date: Year ending December 31, 1991
Reynolds Metals wants to sell its subsidiary, Eskimo Pie Corporation, which represents less than 1% of revenues. Profits from this sale will be used to fund investments in Reynolds’ core business of aluminum. Reynolds has received an offer from Nestle to buyEskimo Pie for $61 million. This analysis will determine whether selling Eskimo Pie to Nestle will produce more revenue or going public and making an Initial Public Offer.
Prior to this analysis, two Investment Banking Companies have already assessed the situation. However, there have been changes in the available data, thus the need for a re-assessment. Changes include Eskimo Pie’s 1991 actual salesbeing approximately $61 million as opposed to the previously forecasted $57 million, net income being closer to $4 million than previously forecasted at $2.89 million, and a decrease in capital expenditures.
2.0 Assumptions
We are assessing the case from the 1991-point of view; we are making a series of assumptions for calculations and forecasts. Please refer to Appendix 1.
2.1Identification of Comparable Companies
We eliminate Hershey Foods Corp. from being a comparable company because although they produce ice-cream products, they are not confined to just ice cream. The scope of their products is much wider than that of Eskimo Pie’s and they operate on an enormously bigger volume. The same applies for Empire of Carolina, Inc..
Ben & Jerry’s Homemade, Inc. is also eliminatedbecause of the difference in distribution and marketing procedures. Ben & Jerry’s have franchised ice cream parlors as well as company-owned ice cream parlors whereas almost all Eskimo Pie products are licensed out to vendors.
Eskimo Pie’s comparable companies include Dreyer’s Grand Ice Cream Inc., Steve’s Homemade Ice Cream Inc., and Tootsie Roll Industries, Inc. Dreyer’s Grand Ice Creamand Steve’s Homemade Ice Cream manufactures and distribute similar products to Eskimo Pie, and all three companies display and sell their products in similar ways. These three companies will be used to assume data for the industry average in calculations.
3.0 Analysis and Results
3.1 Discounted Cash Flow Method
In Exhibit 2 of the case, capital expenditures in 1989 and 1990 increased becauseEskimo Pie bought equipment for the expansion of an ingredients manufacturing facility. This along with a new product line drives the growth of Eskimo Pie. At this stage in the company life cycle, we estimate that Eskimo Pie will reach maturity in 5 years, therefore having declining growth rate until maturity is reached.
Appendix 2 shows the Adjusted - Projected Income Statements for Eskimo Piethat includes all of the previously mentioned changes to the data. The forecast also shows that Eskimo Pie is nearing maturity in its lifecycle; therefore their growth rate in sales will decrease and become constant. The strong sales are reflected in net income, therefore affecting free cash flow as seen in Appendix 4 and the weighted average cost of capital in Appendix 3.
Using the Discounted...