Value of Eskimo Pie, it

¶ … value of Eskimo Pie, it is reasonable to assume that the company's future cash flows will be discounted at 8%. Goldman would prefer that the positive short-term results are extrapolated to derive a long-term projection for future earnings. While the discount rate is reasonable, the project of future earnings is not. Eskimo Pie's business is seasonal, so a good summer delivers good earnings; it is unreasonable to assume that this past summer is indicative of long-term trends. The value of Eskimo Pie, therefore, should be determined only on the basis of a reasonable estimate of expected future cash flows.

One method of evaluating the value of future cash flows is by examining the multiples given to comparative firms. In this case, the multiple of 30x was entirely reasonable, as that was the average paid for comparable firms. At 0.76 per share, this gives a valuation of $23.40 per share, as a standalone company. The total value of Eskimo Pie, therefore, would be $2.52 billion.

2) In order to determine the worthiness of the proposed alternatives for the existing shareholder, it is critical that each alternative be valued. The sale to Nestle has been offered at $61million for the firm; while the IPO at the low end offered $61.4 million. At the high end, the IPO offered $68.05 million.

As an advisor to Reynolds, I would recommend the Nestle offer. There are two reasons for this. The first is that the most significant value component of Eskimo Pie is its brand equity. The product itself is easily replicable, and therefore offers no source of strategic competitive advantage. The Eskimo Pie brand name, however, offers significant competitive advantage. As an advisor to Reynolds, I would point out that in terms of operations, there is nothing special about Eskimo Pie, but the company still receives the benefit of being the first ice cream novelty on the scene and the brand value that flows from that fact. Going solo may grant the firm complete control over than brand, but operationally it does not grant the firm national license and corresponding economies of scale.

The Nestle offer is based upon the opportunity for that company to earn synergies with respect the offering -- combining the strength of the Eskimo Pie brand with the global marketing clout of Nestle. As a standalone company, Eskimo Pie still holds significant value, but not nearly as much values as if it was a standalone operation.