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Case Analysis by Heather Keller

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Reynolds Metals, makers of aluminum foil and other aluminum products, has holdings of Eskimo Pie company, a marketer of frozen novelties v In 1991, they were making a decision to sell their holdings and use the proceeds to fund investments in its aluminum, packaging, and consumer products businesses' v Goldman Sachs assisted in the sale v Nestle Foods offered a bid of $61 million for Eskimo pie v The president of Eskimo Pie, David Clark, did not like the idea of selling Eskimo Pie to Nestle v It would cause Eskimo pie to lose its independence and eliminate their headquarters and top management v Eskimo Pies management contacted Wheat First 22 Should Reynolds Metal take the advice of Goldman Securities to help form a group to attempt a Sachs and sell Eskimo Pie to Nestle, or should they private buyout listen to Wheat First and go with the IPO?
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Alternative 1: Sell Eskimo Pie to Nestle Pros:


v v v v

v v v

Cons:
v

Nestle was highest bidder @ $61 million A contractually guaranteed amount Take less time to close deal Do not have to deal with changes in market conditions Provides least risk and liability Provides liquidity for Reynolds Allows them to concentrate on their core metal businesses Risks in terms of deal closure and contract specifics v Concerns inhibiting the deal closure v Nestle wanted to tailor the transaction to take advantage of its tax conditions v $300,000 in environmental costs estimated for contaminants Bad for Eskimo Pie and its executives v Would no longer be an independent company

Alternative 2: Accept IPO deal proposed by Wheat First Pros:


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Eskimo Pie can continue operating as a stand-alone company v Reynolds could save a local company and local jobs No complicated negotiations and compromises with Nestle

Cons:
v v

Have to deal with market risk Would take several months to complete Not a contractually guaranteed amount Less liquidity for Reynolds

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Total Stand-Alone Value of Eskimo Pie


1991 1992 1993

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sales operating expenses G&A operating profit free cash flow net income FCF +TV
1 PV @ 5.5 % cash total value

$61 41.4 15.8 3.8 2.7 2.3 $2.70 $37.20 $13 $0 0 5 .2

$64.90 44.7 16.8 3.5 2.5 2.1 $2.50

$65.70 45.2 17 3.5 2.5 2.1 $50.76

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IPO Proceeds
offer p e ric s ec l d id d p ia iv en tota p s a l er h re s a ou ta d g h res ts n in eq ityv lu u a e d id d iv en tota l 1 9 n in om 9 1 et c e P/E $4 0 1 .0 $ .5 4 2 $8 2 1 .5 3 1 .5 ,3 6 0 $6 3 4 ,4 1 $4 9 1 ,9 1 $1 2 6 ,4 2 $ ,7 9 3 4 1 .3 2 8 $6 0 1 .0 $ .5 4 2 $0 2 2 .5 $ ,3 6 0 3 1 .5 $3 6 5 ,0 4 $4 9 1 ,9 1 $8 5 6 ,0 5 $ ,7 9 3 4 1 .1 4 5

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IPO proceeds with two different market prices: $14 and $16

Reynolds Proceeds shares ow ned 2788.6 2788.6 stock price $14 $16 special dividend $4.52 $4.52 total per share $18.52 $20.52 total for holdings 51,645$57,222 $

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v v

Reynolds should sell Eskimo Pie to Nestle The proceeds they would be getting from the IPO under both market prices ($14 and $16) are less than the $61 million that Nestle would be giving them Also, the stand alone present value of Eskimo Pie is only $51 million Selling it to Nestle maximizes the cash flow for Reynolds This transaction involves the least risk and liability for Reynolds and they would be getting the cash much faster than they would from an IPO Eskimo Pie would no longer be an

My Decision

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What Really Happened

In 1992, Reynolds Metal Company terminated their negotiations with Nestle Reynolds filed with the SEC for an IPO of the shares of Eskimo Pie Shares were offered at $17, but quickly rose to $20 in its first day of trading CoolBrands International bought all the remaining shares of Eskimo Pie 2000, but then sold them to

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