1.

What is your estimate of the value of Eskimo Pie Corporation as a stand-alone

company?

There are several methods that could be used to evaluate this company. Finding a
method that evaluates the stand-alone value is difficult. The stand-alone is the value
of the company in its present condition therefore the value should be dependent
upon the firm’s own assets and projected future income. This value determines the
company's valuation in relation to other companies in the same industry.

We decided to evaluate this company based upon two methods: The Discounted
Cash Flow Method and the Comparable Approach Method.

The greatest risk using Discounted Cash Flow Method is all the assumptions that
were made. Without knowing and having complete information this method could
report underestimated or overstatement figures. In the Comparable approach
Method the risk is that the value is subject to short-term fluctuations and assumes
all companies can generate the same growth.

Since the actual performance of Eskimo Pie in year 1991 was different from
Goldman’s forecast, our valuation will be based on both the Goldman’s forecast and
actual data with adjustments for comparison. Besides, since the deal lasted from
early 1991 to end of 1991, the valuations as at the beginning and at the end of year
1991 are presented for reference.

i）Discounted Cash Flow Model

Based on Goldman’s forecast, the share value of Eskimo Pie was about $10.03 (at the
beginning of 1991) or $10.38 (at the end of 1991) as a stand-alone company. The
offer price $18.40 (i.e. $61million/3,316,000shares) by Nestle and the IPO proceeds
(i.e. $18.52-$20.52) were both higher than the share value as a stand-alone
company.

Based on actual performance of the company in 1991 and adjusted forecast, the
share value of Eskimo Pie was about $17.27 (at beginning of 1991) or $18.18 (at the
end of 1991). The offer price $18.4 by Nestle and the IPO proceeds (i.e.
$18.52-$20.52) were both higher than the share value as a stand-alone company.

Particularly, we used a WACC of 12.28% as the discounting factor, which could have
been lower by choosing a higher long-term risk-free rate and a higher risk premium
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(currently we assume the market risk premium to be 7%). That is, the share value as
a stand-alone company could have been even lower under the DCF model. We
assume that, amortization and depreciation will be higher each year by the constant
growth rate (4%), because we assumed that the company is already fully operated
and will add more machine (shown in the increase of CAPEX-Capital Expenditure),
the depreciation and the amortization will be higher too. The Net Working Capital
will also increase in growing. And for the result, we estimate the value of the Eskimo
Pie as stand-alone company worth of $33,268 (in thousands).

To conclude, under the DCF model, the value of Eskimo Pie as a stand-alone
company is estimated to be lower than the offer price of the Nestlé’s buyout.

Please refer to Table 1 for detailed calculation and key assumptions made.

ii) Comparable Approach

Based on Goldman’s forecast, the share value of Eskimo Pie was about $19.89 (at the
beginning of 1991) or $21.97 (at the end of 1991). The offer price $18.4 by Nestle
was below the share value. While the IPO proceeds ($18.52-$20.52) might overlap
with the share value if the IPO offer price reached the upper limit of $16.

Based on the actual performance of the company in 1991 and adjusted forecast, the
share value of Eskimo Pie Corporation was about $27.5 (at beginning of 1991) or
$30.25 (at the end of 1991). The offer price $18.4 by Nestle and the IPO proceeds
($18.52-$20.52) were both below the share value.

Please refer to Table 2 for detailed calculation and key assumptions made.

2. Why would Nestle want to acquire Eskimo Pie?

In 1980s, major food company entered the frozen novelties business. It made the
frozen novelties industry growth rapidly and competitive. After acquiring Carnation
in 1986 and Drumstick in 1991, Nestle entered the ice cream novelty market. Nestle
would like to expend its influence in the ice cream novelty market, so Nestle
considered to acquire Eskimo Pie. There were some reasons that make Eskimo Pie a
good investment:
(1) Licensing right
Top 10 licensees account for over 75% of revenues, and Carnation was Eskimo
Pie’s largest licensee and manufacturer.
(2) Brand name recognition
One or more Eskimo Pie brand products were found in 98% of all U.S. grocery
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 stores, and Eskimo Pie is a 70 years old corporation.
(3) Manufacturing Plant and proprietary
Eskimo Pie had three plants, manufacturing the key ingredients and packaging
used by licensees.
(4) Product innovation
Eskimo Pie’s new product program was successful. For example, the new product,
Sugar Freedom Eskimo Pie, was largely responsible for the growth Eskimo Pie
unit market share from 2.3% in 1987 to 5.3% in 1991.

3. Are there potential synergies for Nestle’ s acquisition of Eskimo Pie?

One of the potential synergies if Nestle acquires Eskimo Pie is that total cost of
running both businesses together will be lowered due to combination of
production facilities. For instance, employees in duplicate position in the product
line, distribution and marketing costs can be eliminated. Secondly, Eskimo Pie
had territorial licenses in the frozen novelty industry through national networks
of manufacturers. By acquiring Eskimo Pie, it means that Nestle will take over the
licensing and sublicensing business and therefore eliminates sublicensing costs.

4. Is Eskimo Pie worth more to Nestle than it is worth as a stand-alone company?

The market share of the Eskimo pie shows The Eskimo pie should have the higher
value than which is estimated by Goldman Sachs. Article shows that the market
share is already 5.3%. Hence, the Eskimo pie will have a premium advantage. As
Exhibit 5 shows, the IPO market was promising and might generate more
liquidity and upward price potential to shareholders. Such liquidity and market
optimism might bring more value to shareholders as compared to a private
buyout. Furthermore, At $16 share, the firm and Reynolds obtained more from
the IPO than from the Nestle bid of $61 million. So that above would make
Eskimo Pie worth more to Nestlé than it was worth as a stand-along company.

5. As an advisor to Reynolds, would you recommend the sale to Nestle or the

proposed public offering?
6. Could you evaluate the public offering markets in Asia? Where would you
prefer to raise money for your company (if you have the authority!)? And why?
Table 1: Discounted Cash Flow Approach
a) Valuation based on Goldman’s forecast
Tax rate=40%
rf=4.64%

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βU=1.15((assume equals mean of β U(comparable))
βE=1.17
Assume market risk premium = 7%
Assume r D=9.56% (corporate bond with BBB rating)
Assume market value of equity is the same as the book value
Assume free cash flow grow at 4% per year after 1993.
Assume capital expenditure is equal to average of capex in year 1989 and year 1990
Assume ΔNWC is equal to that of year 1990
Assume Depreciation and Amortization etc remains at the average of 1989 and 1990:
((1006+175+250-154)+(1352+118-58-156))/2 = 1267

Assume debt and cash amount at the end of year 1991 remains the same as at the end of year 1990

Year Ended December 31,

1991 1992 1993
NI $2,893 $3,195 $3,394
Plus Interest *(1-Tax Rate) $32 $23 $15

Plus Depreciation& Amortization etc

(Data from Exhinit 2 cash flow summary) $1,267 $1,267 $1,267
Minus CapEx $1,835 $1,835 $1,835
Minus ΔNWC $905 $905 $905
FCF $1,451 $1,745 $1,935
Terminal Value $23,862
WACC 12.28%
NPV at the beginning of year 1991 $1,291 $1,380 $18,150
Sum of NPV $20,821
Minus Debt $744
Plus Cash $13,191
Equity Value $33,268
No. of Shares 3316
Share value at beginning of year 1991 $10.03

NPV $1,552 $20,407

Sum of NPV $21,958
Minus Debt $744
Plus Cash $13,191
Equity Value $34,405
No. of Shares 3316

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 Share value at the end of year 1991 $10.38

Table 1: Discounted Cash Flow Approach (Continued)

b) Valuation based on actual performance of year 1991 and adjustment

Adjustment on net income forecast and capex is made according actual outcome of year 1991
Base on the actual net income data, adjust the net income forcast in year 1992 and 1993. Assume
net income grow at 10% in year 1992 and 1993
Capital expenditure is expected to be about $1million since year 1992
Other assumptions remain unchanged
Year Ended December 31,
1991 1992 1993
NI $4,000 $4,400 $4,840
Plus Interest *(1-Tax Rate) $32 $23 $15

Plus Depreciation& Amortization $1,267 $1,267 $1,267

Minus CapEx $1,835 $1,000 $1,000
Minus ΔNWC $905 $905 $905
FCF $2,558 $3,785 $4,216
Terminal Value $51,988
WACC 12.43%
NPV at the beginning of year 1991 $2,275 $2,994 $39,543
Sum of NPV $44,812
Minus Debt $744
Plus Cash $13,191
Equity Value $57,259
No. of Shares 3316
Share value at beginning of year 1991 $17.27

NPV at the end of year 1991 $3,366 $44,460

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 Sum of NPV $47,826
Minus Debt $744
Plus Cash $13,191
Equity Value $60,273
No. of Shares 3316
Share value at the end of year 1991 $18.18

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Table 2: Multiple Approach
Valuation based on Goldman Sachs Forecast
PE of Comparable companies 22.8x
EPS(year 1991) $0.87
Price at the beginning of year 1991 $19.89
EPS(year 1992) $0.96
Price at the end of year 1991 $21.97

Valuation based on actual performance of year 1991 and adjustment

PE of Comparable companies 22.8x
EPS(year 1991) $1.21
Price at the beginning of year 1991 $27.50
EPS(year 1992) $1.33
Price at the end of year 1991 $30.25

Market
Net Value of Total Levering Unlevered
Company Sales Income Equity Debt Beta Factor Beta P/E

Ben & Jerry's $97.0 $3.7 $110.1 $2.8 1.2 1.03 1.17 29.76
Dreyer's
Grand Ice
Cream $354.9 $15.9 $534.0 $44.3 1.4 1.08 1.29 33.58
Empire of
Carolina, Inc. $243.1 $8.8 $51.4 $89.8 0.3 2.75 0.11 5.84
Steve's
Homemade
Ice Cream $35.1 $1.8 $37.4 $3.1 2.5 1.08 2.31 20.78
Hershey
Foods Corp. $2,899.2 $219.5 $4,002.5 $282.9 1.0 1.07 0.93 18.23
Tootsie Roll
Inds. $207.9 $25.5 $728.8 $0.0 1.0 1.00 1.00 28.58
Average 1.14 22.80