Eskimo Cake Case Portion 1 “As an consultant to Reynolds, would you advise the sale to Nestle or perhaps the proposed IPO? Subpoints: 1 . The managers of Eskimo Quiche wanted to you should find an alternative to Nestle’s acquisition provide for one main reason: Eskimo quiche would reduce its independence. If Nestle went through with the acquisition, Eskimo would not continue its tradition of being a stand-alone organization in Richmond with this meaning that their headquarters and management personnel would probably be replaced too.
Fundamentally, Eskimo was reluctant to staying acquired by Nestle because it felt it will be an aggressive takeover from the company. It will ruin a 70-year very long business to take advantage of its duty conditions and it would almost certainly transform the business enterprise similar to a traditional integrated manufacturing and advertising approach. 2 . David Clark simon knew that Goldman Sachs had a long-lasting relationship with Reynolds and Nestle. This meant that GS had a conflict of interest in this obtain.
The solution that would best meet GS’s hobbies would be to sell off Eskimo to Nestle yet this might not be the very best solution for Eskimo. Therefore David Clark simon is dealing with Wheat Initial Securities rather than Goldman Sachs because he planned to find an option to Nestle’s offer. Since Wheat or grain First Securities had no long-standing romantic relationship with nor Reynolds neither Nestle, completely no conflict with client positions in this buy. It could observe with more objectiveness which buy is the best to get Eskimo.
Furthermore David had personal interest in working with WFS because his individual position could possibly be put at risk by a Nestle acquisition. several. IPO option: Bulls| Bears| * Great IPO industry conditions, when it comes to number of discounts and value| * Not any exploitation of possible synergies with rivals, confirmed simply by Nestle while the major bidder| * Current forecasts that contain results (Sales, Net Income, Capex) better than expected| * Timing ” an IPO offer would require a longer period than a non-public sale| 5. Proceeds from the sale at least equal to Nestle’s offer in the worst hypothesis ($14 talk about rice)| * Uncertainty , related to value and long term market conditions| * Less complications- no terms, procedures, negotiations, or compromises| 2. Lack of experience of Wheat or grain First Securities| * Social Benefits ” saving a local company and jobs| | * Reynold would be able to acquire liquidity| | Part 2 1 . With the DFCF version with the projections of Wheat or grain First and growth of FCF of five per cent, the collateral value from the firm is $47. 286 million. Therefore the offer from Nestle of $61 million is appealing intended for Reynolds, aiming to sell the business.
Also the proceeds from the IPO proposed by the supervision and Wheat or grain First Investments are able to adequately compensate Reynolds. Assuming a cost range within $14 , $16, the net proceeds pertaining to Reynolds can be $51. 652 and $57. 230 correspondingly, still more than the regarded as equity value. As a matter of fact the private sales to Nestle is still the most convenient to Reynolds. 2 . To value Eskimo Pie using multiples method we should decide whether to work with the deal multiple, obtainable from the Drumstick deal, or business and market based multiples. The implied benefit on product sales from Drumstick transaction may be used to assess the worth of the company only if the 2 companies and deals are significantly identical. In this case exact information are not available and the peculiar business design of Eskimo Pie, based upon licensing, makes this method certainly not highly dependable. * Many based on organization and market data mean the use of realized or forecasted values. The management of Eskimo Quiche forecasts larger sales in the foreseeable future years, therefore using realized data to calculate the importance of the company could lead to mispricing.
Which means information of 1991 can be used to apply the method. * Looking at identical companies, two firms will be operating in similar business, Empire of Carolina, Inc. and Steve’s Home made Ice Cream. As multiples depending on operating steps such as EBIT or EBITDA depend less on firm leverage and cash than patients based on Income and we possess relevant data available coming from those two companies, interminables like EV/EBITDA or Company Value/EBIT seems to be most accurate. Considering the computations in Display 7 based upon the Company Value/EBIT multiple, Reynolds ought to sell Eskimo Pie intended for an amount no less than $56. sixty-eight million. The offer from Nestle is consistent with this valuation from the company, while the arises from the IPO are adequate to sufficiently compensate Reynolds only if the share price are higher than $15. 66. In spite of, if we take into account the implied value using the P/E multiple or perhaps transaction multiple, the threshold to sell the company is also higher ($82. 891 and $73. two hundred respectively). As a result, neither the IPO option nor the Nestle provide are appealing to Reynolds. a few. The theory says that interminables only work if the comparison group is adequately comparable in all other aspects.
In order to know if we might use other companies’ multiples and also the average of these we must decide if they are completely comparable to Eskimo, in other words we should see if the value drivers in the firms happen to be approximately a similar. The qualified companies with regards to business model and structure will be Empire of Carolina, Incorporation. and Steve’s Homemade since they equally market goodies and permit their method. All the other companies having a distinct business model and structure will not be taken into consideration because comparable businesses.
As a first comparable driver we uses the functioning profit perimeter. Eskimo includes a 6, 83% operating income margin computed on data of 1990 (exhibit 1). Carolina and Steve instead have respectively 15, 38% and 11, 11% working profit margins. This kind of tells us that¦ The duty rate may be the same for any companies it is therefore not a relevant driver in making a choice on what comparable business to use. Since we you do not have the cost of capital and the cost of debt, we all will evaluate the risk school and leverage among the regarded as companies.
You observe that Carolina and Charlie have very different risk classes, one is a C and the other can be described as BBB, Eskimo on the other hand is a BBB because to compute the WACC we applied a cost of debt relevant to long-term connection in the BETTER BUSINESS BUREAU risk school. So this means that¦ The leverage from the three businesses are 0, ’07 (Eskimo), 0, 08 (Steve) and you, 747 (Carolina). Carolina has a very high leveraging because it is debt is far more than 1, 5 times it is equity, instead the different two have a financial debt which is substandard to their equity.
So even if the two businesses have similar business versions, through a deeper analysis we found that Eskimo is effectively a lot like Steve nevertheless very different admiration to Carolina. Steve includes a closer functioning margin to Eskimo’s than Carolina. It also is in the same risk category, and its leverage is alligned with Eskimo’s. Carolina on the other hand has more than double of Eskimo’s operating margin. Its in a riskier class and its particular leverage is much higher than Eskimo’s. Therefore it was correct to work with Steve’s Home made Ice Cream as a comparable firm.
The only circumstance in which we might use an common, instead, will be if the two companies were both very similar to Eskimo. 4. The fact that DFCF approach gives a lower value intended for the company than multiples-based approaches depends on market drivers. In particular, the case can be that the DFCF model implies a WACC that does not echo the cost of capital and intended risk recognized by the marketplace. As a matter of fact the market overvalues long term growth chances, leading to substantial multiples on EBIT and Earnings.
