Eskimo Pie

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Introduction
Eskimo Pie Corporation is a frozen novelties company that sells ice cream bars. The company earns its revenues by licensing the rights to produce Eskimo Pie brand products, sublicensing the rights to produce Welch’s and Heath brand products, and by manufacturing and distributing ingredients for the dairy industry. The frozen novelties industry is currently transitioning to a period of low growth but remains very competitive, containing over 400 brands and $1.3 billion in sales. Reynolds Metal, the primary owner of Eskimo Pie, announced its intentions to sell the company in 1991. Goldman Sachs has been hired to facilitate the sale based on its involvement in Nestlé’s previous acquisition of Drumstick. Nestlé is now offering the leading bid to purchase Eskimo Pie for $61 million dollars. Although Nestlé’s offer of 61 billion dollars exceeds Goldman’s estimated sale price, the President of Eskimo Pie, David Clark, is concerned about the acquisition. He notes that the sale of Eskimo Pie to Nestle will result in a consolidation of the Eskimo Pie headquarters, and an imminent dismissal of management staff. As an alternative to the acquisition, Wheat First has proposed taking Eskimo Pie public through an Initial Public Offering (IPO). Following an initial projection, Wheat First estimates the offering price to be between $14 and $16 per share, which would at least match the price being offered by Nestle. Despite positive forecasts, Goldman Sachs continues to advocate for the acquisition due to market uncertainties that can hinder the success of an IPO.

Issue
The Eskimo Pie company is faced with the decision to take the company public through an IPO, or accept Nestlé’s acquisition offer of $61 billion. Despite subsequent effects of consolidation, the decision must be justified by each alternative’s profitability. Therefore, the correct decision relies on the accuracy of Goldman’s valuation of the firm and Wheat First’s financial projections for an IPO. As such, the team has been hired to provide a fairness opinion to help reconcile the differing valuations.

Analysis
Key Drivers
Listed below are the most influential and relevant drivers in the subsequent forecasted financial statements, as they vary between scenarios and/or from the last historical year:  Sales Growth  Cost of Goods Sold  Advertising and Promotional Costs  General and Administrative Costs  Dividends Paid  Net fixed assets as a percentage of sales

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Base Case Scenario
Despite characteristics of a maturing industry, the consulting team believes that Eskimo Pie possesses the ability to generate strong sales growth through increased market share. The Company has increased unit market share of Eskimo products in each of the past four years, giving the team confidence that it can continue that trend into the future. One growth opportunity is to expand into international markets. Possible targets include the United Kingdom, Central and South America, and Australia and New Zealand. As a convenience good, ice cream is accessible to all socioeconomic classes, and it is a recognized dessert item across many cultures. Thus, it is not a far stretch to believe that other countries would enjoy and purchase Eskimo Pie’s products. Additionally, there are opportunities to diversify the product line by offering new variations of ice cream novelties. In fact, Eskimo Pie has already experienced market share growth after introducing sugar free products, and a fat free product is currently in test marketing. The team believes that there are opportunities to further profit from consumer taste preferences, possibly by introducing strawberry and mint flavored items, among others. Eskimo Pie has a strong track record for product innovation, and this core competency will lead to continued high sales growth. However, the team expects a 6% terminal sales growth rate in 1997 as the industry fully matures and Eskimo Pie has all but...
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