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Copyright © 1992 by the President and Fellows of Harvard College. Harvard Business School case 293-084.
In early 1991, Reynolds Metals, the makers of Aluminum Foil and other aluminum products, decided to sell its holding of Eskimo Pie, a marketer of branded frozen novelties. Reynolds had few interests outside its aluminum and packaging business, and the Eskimo Pie Corporation, with roughly $47 million in sales, accounted for less than 1% of Reynolds revenues. Reynolds planned to use the proceeds from the sale of Eskimo Pie to fund investments in its core aluminum business. Eskimo Pie was 84% owned by Reynolds Metals and 4% owned by the Reynolds Foundation. The remaining 12% of Eskimo Pie was held by various Reynolds family members and a small group of outside investors. Goldman Sachs, a New York investment-banking firm, was retained to assist with the sale of Eskimo Pie. Goldman estimated that the sale price of Eskimo Pie would be about 1.2 times 1990 sales or about $57 million. In 1990, Nestle Foods paid a comparable multiple for Drumstick, another ice cream novelty company. Goldman organized an auction for Eskimo Pie, and Nestle was the highest of six bidders, with a price of $61 million. Mr. David Clark, president of Eskimo Pie Corporation, recognized that the sale of Eskimo Pie to Nestle would mean the end of its independence. Nestle was likely to consolidate its ice cream novelty businesses by eliminating, Eskimo Pie's headquarters and management staff. Clark had struggled to find a way to keep the company independent since he first learned of the sale, but he had been unable to raise sufficient funds, to purchase Eskimo Pie in a Leveraged buyout (LBO), and the sale to Nestle seemed inevitable. Background Eskimo Pie, a chocolate-covered bar of vanilla ice cream, was the first ice cream novelty. Its history appears on the Eskimo Pie box:
Genuine Eskimo Pie . . . One day [while] working in a confectionery store to supplement his teaching income, Christian K. Nelson became puzzled by a little boy's indecision between a chocolate candy bar and a scoop of ice cream When questioned, the freckle-faced boy replied, "I want 'em both but I only got a nickel.'. With a clever hunch and a little ingenuity, Mr. Nelson found a way to combine the two ingredients in what would become America's first chocolate-covered ice cream bar. The little boy got his wish and Mr. Nelson founded a corporation on the success of the Eskimo Pie product.
By the spring of 1922. which was later renamed Reynolds Metal Company. US Foil Company. Nelson's recipe. The first was the licensing of the Eskimo Pie brand products and the sublicensing of Welsh's and Heath brand products. Exhibit 1 presents historical financial information for Eskimo Pie from 1987 to 1990. One year later. Eskimo Pie licensed rights to make and distribute the Eskimo Pie bar according to Mr. In spite of the popularity of Eskimo Pies. and sale of Eskimo Pie brand products through a national network of about 20 dairy product . The company was also engaged in intensive research and product development efforts to extend its product lines.Christian Nelson. He introduced his product as the "I-Scream-Bar" in 1921. designed a tin foil wrapper that added to the product's glamour and provided a mechanism to collect royalties. Eskimo Pie had a total of 130 employees. and yet the firm could not pay it’s debt of $100. it was estimated that over 1 billion Eskimo Pies had been sold. began trying to make chocolate stick to ice cream in 1920 while operating an ice cream and confectionery store in Iowa. Sales were averaging 1 million Eskimo Pies a day and soared to 2 million a day by early summer. Nelson sold Eskimo Pie to the US Foil Company. and in 1924. manufactured the printed wrappers around the clock to satisfy demand. After months of experimentation. Nelson’s business partner. 1991 Operations Eskimo Pie had two lines of business in 1991. Eskimo Pie had difficulty collecting royalties both because the company lacked a reliable accounting system and because of patent infringers. Nelson formed a partnership with Russell Stover. Russell Stover.000. and the product was renamed Eskimo Pie. age 27. Table A presents the sales breakdown of these businesses. Mr. the Eskimo Pie Corporation was not financially successful. Eskimo Pie Corporation became a subsidiary of US Foil Company. By the summer of 1921. Nelson discovered that cocoa butler made the chocolate adhere to the ice cream.700 manufacturers across the country. Because the lack of refrigeration made centralized production and distribution impossible. Licensing Eskimo Pie granted exclusive territorial licenses for the manufacture. and Exhibit 2 contains a summary of cash flows from 1989 and 1990. distribution. Nelson was paid a small fraction of a cent in royalties on every Eskimo Pie sold thereafter. The second was a manufacturing operation that produced and distributed ingredients and packaging for the dairy industry. licenses had been sold to 2.
Exhibit 3 shows the distribution and market share of Eskimo Pie products (including Heath and Welch's) during the 1987-1991 period. These plants manufactured key ingredients and packaging used by licensees. Eskimo Pie purchased the base ingredients from the food companies and resold them. Eskimo Pie also sublicensed the manufacture and distribution of frozen novelties under established brand names of other food companies. such as the proprietary chocolate coating. that gave Eskimo Pie products their distinctive flavor. Eskimo's licensees agreed to maintain the company's strict quality standards. who owned the Heath brand name. and Eskimo maintained the right to inspect all premises used for the manufacture and handling of Eskimo products. The plants also produced generic ingredients and packaging sold both to licensees and nonlicensees in the dairy industry. shortly after it acquired Carnation. the balance went to regional consumer promotions using television and coupon campaigns. Nestle terminated the sublicensing arrangement. Sublicensing had been an important component of Eskimo Pie's strategy since 1975 when it developed the Nestle Crunch bar and sublicensed its manufacture and distribution. One or more of the company's Eskimo Pie brand products were found in 98% of all US grocery stores. Payment to Eskimo Pie by licensees was embedded in the price paid for ingredients and packaging supplied by Eskimo Pie rather than as a royalty payment based on units sold. Eskimo Pie provided centralized marketing for Eskimo Pie. In 1991. In 1986. If a licensee elected to use outside parties for certain ingredients and packaging. Manufacturing Eskimo Pie operated three plants in the United States. Carnation was Eskimo Pie's largest licensee and manufacturer with territorial licenses to 11 western states. Eskimo Pie licensed frozen novelties for Welch's and Leaf Incorporated. Midnite Sun. The majority of marketing expenses were spent on retail advertising and promotions.manufacturers. to sub licensees. and Heath brand products. The . Approximately 80% of the Eskimo Pie brand licensees were also licensees for Welch's and/or Heath products. Eskimo Pie had the exclusive authority to grant sublicenses for the manufacture and sale of these products similar to the way it did for its own Eskimo Pie brand products. The licensees were Eskimo Pie's direct customers. Under the arrangements. along with packaging. and the top l0 licensees accounted for over 75% of revenues. and Eskimo Pie enjoyed one of the highest consumer brand name recognition levels is the industry. Welch's. the licensee then paid Eskimo Pie a trademark license fee.
Eskimo Pie was the first to market a sugar. The company was also the first to introduce a fat. major food companies such as General Foods. and Coca Cola entered the frozen novelties business. Nestle's Offer Reynolds retained Goldman Sachs.3 billion. expanded to over 500 by 1987. and it held a patent on that product's coating. By the end of 1991. Table B shows the top five frozen novelties as ranked by unit market share in 1991. This transformed the industry's structure of low growth.free frozen novelty product made with Simplesse. little advertising. Advertising expenditures increased from less than $2 million to $75 million per year during this period.06. The number of ice cream novelty brands.free frozen dairy novelty bar made with NutraSweet. By 1991 advertising expenditures had been reduced to about $25 million. By the late 1980s. and few participants into a rapidly growing industry. the industry began to consolidate with many of the larger companies exiting or significantly reducing their commitment to the frozen novelty business. the Sugar Freedom Eskimo Pie products were leading the Eskimo Pie line.5 billion by 1987. The introduction of Sugar Freedom Eskimo Pie products in 1987 was largely responsible for the growth of Eskimo Pie's unit market share from 2. with over 400 brands representing sales of $1.3% in 1987 to 5. and the market growth had slowed significantly. The plants also employed 18 salaried employees. 100 in 1980. a patented fat substitute. During the 1980s.plants employed a total of 46 hourly workers at an average hourly wage of $10. recognizing that Eskimo Pie would be unlikely to continue its 71-year history of operating as a . Mars.free ice cream sandwich and expected to introduce a Fat Freedom Eskimo Pie line in the spring of 1992. Eskimo Pie because of its long-standing relationship wish Reynolds and because it represented Nestle in its Drumstick acquisition. Industry revenues went from $590 million in 1980 to $1. The Frozen Novelty Industry The frozen novelty industry in 1991 was highly fragmented. Exhibit 4 presents the frozen novelties sales trends. David Clark was directed to work with the Goldman Sachs team that arrived in April 1991 to prepare a sales strategy and the documentation required by buyers. Clark and his staff cooperated reluctantly.3% in 1991. Product Innovation Eskimo Pie's new product program was successful: ten products introduced since 1987 were being actively marketed and sold in 1991. Eskimo Pie was test marketing a fat. As of 1991.
Negotiations between Reynolds and Nestle progressed slowly because of two complications.financed LBOs. investment banking firm.stand-alone company in Richmond and that its corporate staff would be unlikely to retain their positions. debt. Also. had submitted the highest bid seemed to confirm Goldman's reasoning. Reynolds had n dismissed this possibility early on. First. Carnation and Drumstick units. and Reynolds began negotiating the specifics of the sale in mid-1991. Wheat . This group obtained $20 million in credit and contributed another $15 million in equity. searching for an alternative to the Nestle acquisition that would keep Eskimo Pie independent.borrowing because the business was not asset intensive. it was becoming apparent that Eskimo Pie was going to have a record year. wanted to tailor the transaction to take advantage of its tax conditions. Nestle. Reynolds received six offers for Eskimo Pie. The company contacted the regulatory authorities and conducted testing to determine the extent of any contamination. Eskimo Pie had also accumulated a $13 million cash reserve. a Richmond. Eskimo Pie's management and Wheat First Securities. Any solution would have to provide Reynolds with as much cash as the proposed acquisition. and oils were disposed of at its New Jersey plant. inks. Although Eskimo Pie did not expect cleanup costs to exceed $300. at the advice of Goldman Sachs. Virginia. Many expressed interest but were concerned that Eskimo Pie's licensing approach to the business diverged from the store traditional integrated manufacturing and marketing approach. a Swiss company. The buyout proposal could not secure additional financing because of the generally tight credit environment and the unpopularity of high.yield. David Clark contacted Wheat First again. In addition. Second. Exhibit 6 presents the projected income statements that Goldman collected. The fact that Nestle.000. Nestle remained cautious. Sales were higher than anticipated and operating margins had improved. Goldman contacted several potential buyers. but the bid was rejected early on when higher offers came in. The Proposed Initial Public Offering As the end of fiscal year 1991 approached. Wheat first proposed the i itial public offering (IPO) of Reynolds' shares. Nestle Foods was the highest bidder at $61 million. with its potential synergies in its. Eskimo Pie could not use secured. Goldman argued that a public offering would be worth less than a private sale because of the potential for synergies with an acquiring firm. Eskimo Pie discovered in the third quarter of 1991 that a small quantity of cleanup solvents. formed a group to attempt a private buyout.
had two reasons to think that its IPO might yield more tha n the sale to Nestle. An IPO would take several months to complete. First. Wheat First and the management of Eskimo Pie stressed that with a public offering. Wheat First had not done business with Reynolds. The forecasted 1991 net income in Exhibit 6 was $2. the new issues market was hot. an offering the size of the proposed Eskimo Pie deal would be one of Wheat First's largest. Goldman argued that a deal with Nestle was more certain. and Goldman Sachs advised Reynolds Metals against the IPO. were 24x and 24. the sale of Eskimo pie by Reynolds would be made much easier. . an independent Eskimo Pie would stay in Richmond. The sale to Nestle was likely to be closed soon. Furthermore. respectively. Exhibit 7 shows the proceeds from the IPOs at the two offering prices. the firm and Reynolds obtained more from the IPO than from the Nestle bid of $61 million. Exhibit 8 shows that price/earnings ratios for comparable companies such as Ben & Jerry's and Dreyer's Grand Ice Cream. actual results were going to be closer to $4. without the complications and conditions that Nestle wanted to attach to its purchase of Eskimo Pie. especially in light of the potential public offering.First.000. or $4. First. the IPO equaled the Nestle offer.2x. and they remained skeptical that an IPO could yield as much as the private sale. Capital expenditures were expected to be less than $1 million in 1992. The $15 million dividend would be funded by the $13 million in cash that Eskimo Pie had accumulated and another $2 million in debt. Wheat First estimated that the offering price would be between $14 and $16 a share.3 million secondary shares with the option to offer 10-15% more shares.000. actual sales would be about $61 million. and Reynolds would risk changes in market conditions that would cool off the IPO market. and the number of new issues and their dollar values. even at an offering price of $14. The second step of the transaction was an IPO of up to 100% of the existing Eskimo Pie common shares. Wheat First was working with an updated forecast. At $16 a share. Wheat First suggested offering 3. In addition. The S&P 500 was trading at 25x earnings at the time. Furthermore.893. and it projected a more promising outlook. The "green shoe" clause would provide cash to pay off the $2 million loan. however. allowing Reynolds to get liquidity while saving a local company and local jobs. soared. And forecasted sales in 1991 were projected at about $57 million. and provide over $2 million in working capital. as Exhibit 5 shows. special dividend. without complicated negotiations and compromises. Wheat First proposed a two-step transaction. Second.000.52 per share. Eskimo Pie would pay out a $15 million.
191 $ 9.241 $ 5.502) $ (1.723 $ 13.107 23.780 Gross Profit Advertising and Sales General & Administrative $ 9.327) $ (1.05 $ 0.957 $ 31.358) $ (1.616 171 $ 1.328 $ 3.422 $ 2.422 $ 2.063 EXHIBIT 2 Cash Flow Summary (thousands of dollars) Year Ended December 31.060 $ 14.709 $ 47.595 $ $ 5.769 $ 36.752 $ 15.32 $ 0.316 3.735 $ 29.412) $ (1.316 0.857 $ 1.225 Interest Income $ 308 $ 550 $ 801 $ 1.40 $ 0.109 $ 10.76 ------$ 0.502) $ 3.316 3.742 $ 4.691) $ 1.511 $ 1.006 $ 1.496 $ (2.342 $ 20.054 $ $ 154 $ $ 6.614 2. 1989 1990 Operating Activities Net Income $ 2.030 $ 5.269 $ 16.327) $ (175) $ (175) $ (1.40 2.468 $ 8.094 17.418 $ 4.198 Cost of Goods Sold $ 21.382 Operating income (loss) $ (1.394 $ 7.650 $ 25.006 5.635 $ 31.352 Amortization Deferred Income Taxes Pension liability & other Decrease in Receivables Decrease in Inventories Increase in Payables to Parent Increase in AP and Expenses Net Cash Provided Investing Activities Capital Expenditures Other Net Cash Used Financing Activities Cash Dividends Principal Pmts on Long Term Debt Increase (Decrease) in Cash and Equivalents for year Cash and Equivalents before year Cash and Equivalents after year $ $ $ 175 $ 250 $ (154) $ 118 (58) (156) (734) (51) (621) 3.723 $ 13.004 Interest Expense $ (88) $ (107) $ (88) $ (67) Other income (expense) $ 1.830 $ 26.068 $ 5. of Shares Outstanding Income Per Share Dividend Per Share $ $ 96 $ 729 $ 1.316 3. 1987 1988 1989 1990 Income Statement Data Net Sales $ 30.723 $ 10.738 $ (77) $ (108) $ (20) Income Taxes Net Income Balance Sheet Data Cash Working Capital Total Assets Total Debt Stockholders Equity Per Share Data Weighted Avg.403 $ 6.162 $ $ $ $ 11.130 $ 6.215 $ 11.159 $ 919 $ 18.518 $ 744 $ 19.EXHIBIT 1 Historical Financial Information (thousands of dollars except per share data) Year Ended December 31.215 $ 10.550 $ 8.526 Depreciation $ 1.191 .416 $ 3.479) $ (1.109 $ 10.212 $ $ (524) $ $ 2.053 $ 2.526 $ 1.311) $ (121) $ (101) $ (2.006 1.119 $ 11.695 $ 46.73 $ 0.
355 $ 1.Heath Products are included only in 1991 EXHIBIT 3 Distribution and Market Share of Eskimo Pie.6% stores Unit Market Share 3.400 $ 1. and Welch's Novelties 1987 1988 1989 1990 At least one Eskimo product at US grocery 76.7% 6.1% 577 17.2% 95.09 $ 2.6% 5. 1989 1990 1991 58% 14% 28% 59% 14% 27% 56% 24% 20% TABLE B 1991 Leading Frozen Novelty Brand Brand Company Popsicle Unilever Klondike Empire of Carolina Eskimo Pie Eskimo Pie Snickers Mars Weight Watchers HJ Heinz 1985 1 2 1 2 Unit Share 7.332 $ 1.1% 637 -9.25 4 5.500 $ 1.3% 457 13. Heath.24 1991 97.06 $ 2.5% EXHIBIT 5 Initial Public Offerings (volume in billions of dollars by quarter) 1986 1 2 2 7 12 3 5 4 10 1987 1 9 2 7.5 1 3.100 $ 1.3 3 7.19 $ 2.79 $ 1. and Welch's Novelties Industry Revenues $ 590 $ 680 $ 770 $ 940 $ 1.8% Average Prive N/A N/A $ 1.4% 5.90 $ 2.13 $ 2.1 1 4.25 2 3 1985 1986 1987 1.8% EXHIBIT 4 Distribution and Market Share of Eskimo Pie.1 1988 1989 1990 1991 4 1.8% 4.1% 91.3% 4.02 $ 2. Spending $ 2 $ 4 $ 17 $ 23 $ 32 $ 44 $ 77 $ 38 $ 26 $ 40 $ 21 1 2 1991 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 .5 Millions of 19886 Dollars 4 1989 2 1990 0 1 5 2 7 3 5.3% 3.2 1 2.3% 78.2% 525 22.7% 717 7. Heath.3% *-.TABLE A Sales by Business Line Business Licensing Eskimo Pie Welch's and Heath* Flavors and Packaging Year Ended December 31.9% 5.0% 643 18.2% 681 7.321 Units % Change Sold in Sales N/A N/A N/A 15.69 $ 1.7% 590 -0.1 8 4 6.9% 7.7% 623 -1.8 2 6 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Those in Bold are in Millions Advertis.300 $ 1.1 2 3 3 4 4 4.
325 $ 5.9 $ - Company Ben & Jerry's $ 97.749 $ 3.7% $ 2.645 $ 57.EXHIBIT 6 Goldman Sachs's Projected Income Statements Year Ended December 31.658 $ 1.335.4% 5.195 $ 3.624 $ 828 $ 890 $ 1.5 3316.38 14.961 $ 51.0 Treasury Yields Book Value of Equity Market Value of Equity B E T A 90 day 6 month 1 year 5 years 10 years 30 years Prime Rate Prime Cmrcl.7 $ 10.899.15 2788.8 $ 44.3 2.130 $ 2.228 $ 59.3 $ 32.6 16.52 $ 20.0 $ 219.8 $ 11.76% .2 $ 25.0 Dreyer's Grand Ice Cream $ 354.222 EXHIBIT 9 Selected Financial Market Data EXHIBIT 8 Financial Information for Comparable Companies (millions of dollars) Sales Cash Flow Operating Income Net Income Total Debt $ 2.6 $ 14.64% 6.1 Steve's Homemade Ice Cream 35.064 $ 14.42% 7.055 $ 3.50% 4.52 $ 51.3 $ 463.0 1.821 $ 5.892 $ 3.7 $ 26.5 $ 46.1 $ 534.5 $ 1.9 $ 1.395 5.1 $ Hershey Foods Corp.52 $ 18.473 $ 4.8 $ 45.52 $ 2788.655 $ 59.5 $ 24.00 4.1 $ 2.5 $ 152.337 $ 4. $2.8 $ 110.045 $ 4.991 $ 61.3 $ 89.6 1326.0 $ 51.928 $ 2.2 1.4 $ 4.52 Total 1991 Net Income Implied P/E Multiple Reynolds's Proceeds Shares Owned Stock Price Special Dividend Total Per Share Total for Holdings $ 18.7 $ 3.2 $ 3.9 Empire of Carolina $ 243.6 1326.56% 4. $ 207.61% 4.41 $ 2. Paper 4.058 $ 52.00 4.610 $ 54.5 1.4 $ 8.00 $ $ 4.5 $ 4.4 0.52 $ 20.4 $ 37.422 $ 68.8 1.62% 7.9 $ 113.002.1 $ 282.431 $ 53.2% 5.56 1326.8 $ 3.1 $ 292.9 $ 6.749 12.00 $ $ 4.5 $ 728.755 $ 55.52 3316.5 $ 38.6 EXHIBIT 7 IPO Proceeds Offer Price Special Dividend Total Per Share Shares Outstanding Equity Value Dividend 3 4 7 10 $ 14.3 $ 24.5 $ 47.52 $ 16.92% 7. 1991 1992 1993 Income Statement Data Net Sales General & Administrative Operating income (loss) Interest Income Interest Expense Pretax Income Income Taxes Tax Rate Net Income Margin Earnings Per Share Average Shares Outstanding $ 55.8 $ 37.0 $ 15.18 $ 2.991 $ 14.1 $ 37.1 $ 16.263 40% 40% 40% $ 2.2 Tootsie Roll Inds.
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