Statement of Purpose: The purpose of this analysis is to determine if Reynolds Metals (“Reynolds”) should accept Nestlé’s offer of $61 million for its holdings of Eskimo Pie. The crux of the issue is whether or not the projected income from a proposed Initial Public Offering (“IPO”) by Wheat First Securities (“Wheat First”) is reasonable and will actually result in proceeds between $61 and $68 million to Reynolds, the Reynolds family and the Reynolds foundation, as projected. To get at this question, this paper will seek to value Eskimo Pie as a stand-alone company, if the IPO option is selected.
Discount Rate: The first task is to estimate the discount rate, or the rate that investors will require on this type of investment. In…show more content… As previously mentioned, net sales will be estimated beginning with the $61 million in net sales projected for 1991, then relying on Goldman Sach’s projected growth rate for 1992 and 1993, and using a 5% growth rate from that point forward. Net income is estimated for 1992 and 1993 using Goldman Sach’s estimate of the margin.
Free cash flow is then estimated from the net income by subtracting capital expenditures, which are estimated to be less than $1 million for 1992. Additionally, there are several additional expenses for 1991 that I believe are ignored by Goldman Sach’s estimate. The first is the potential clean-up costs from the spill in the New Jersey plant, estimated at $300,000. However, weighing other possible outcomes, I estimate the cost to be $374,000, occurring by the end of 1991.
Further, even in the pre-Sarbanes-Oxley era, the cost of an IPO, and the subsequent filing documents required by the SEC, is significant. I estimate the cost of the IPO to be $1 million in 1992, and $500,000 each year after for the filing requirements (or the cost of being public). These amounts are subtracted from the free cash flows in the appropriate years.
Thus, I estimate the value of Eskimo Pie, as a stand-alone company, to be $31,770,219. This is significantly lower than the $61,412,000 or $68,044,000 that Wheat First predicts the IPO will generate.