EF5042- Individual Case Questions:

Eskimo Pie Corporation

Due by Friday, 17 October 2014
You are responsible for handing in written answers to the following questions drawn from the
Eskimo Pie Corporation case. You can work with others on this assignment, but each individual
must hand in their own set of answers.

1. Why do the managers of Eskimo Pie want to find an alternative to the Nestle acquisition?
The President of Eskimo Pie and its management staff were afraid of losing its independence or
even disappearance after the Nestle acquisition. The acquisition would mean the disappearance
of 70 years stand alone operation history of the company. It was forecasted that Nestle would
consolidate its ice-cream business by restructuring Eskimo Pie. The restructure would influence
the position of Eskimo Pies headquarters, management staff and employees who built up longterm relationship with this company. Nestle might also change the companys business direction
after the acquisition. Nestle would terminate all licensing arrangement which were the main
business line of Eskimo Pie. In the past record, Nestle terminated the sublicensing arrangement
in 1986 after acquisition of Carnation.
Moreover, there were obstacles during the negations of the acquisition. They were argued for the
transaction details which fit Nestles expectation in tax condition and the clearance cost of
contamination disposed by Eskimo Pies plant. As Reynolds Metals aimed at reinvestment of its
core aluminum business by selling Eskimo Pie, the negation obstacles would slow down the
acquisition progress. Hence, the managers of Eskimo Pie would like to find an alternative to the
Nestle acquisition.

2. Why would Nestle want to acquire Eskimo Pie? Are there potential synergies such as
economies of scale? Is Eskimo Pie worth more to Nestle than it is worth as a stand-alone
company?
Before the acquisition, Nestle and Eskimo Pie were marketing competitors in frozen novelty
industry. Eskimo Pie was the top 3 brand in the industry in 1991. From the passage, the industry
growth was slowed down in 1980s. Acquisition of Eskimo Pie would enlarge the market share
of Nestle and consolidate its leading role in the industry.
There were potential synergies in the Nestle acquisition from the point of view of Nestle. Eskimo
Pie had all-rounded licensing arrangement in the product line of the industry with national

network. Eskimo Pie also manufactured ingredients and packaging with plants. Eskimo Pie was
succeed in product innovation. Nestle had acquired Drumstick and Carnation before. If Nestle
also acquire Eskimo Pie, Nestle could reduce cost and employees in duplicate position by
combination of product lines.

3. What would be the capital structure (i.e., debt ratio) of Eskimo Pie after its IPO if Reynolds
Metals accepts the two-step transaction proposed by Wheat First?
The debt ratio = (total asset total equity) / total asset
The two step transactions would lower total assets since it withdrew cash and debt. The issuance
of common share would enlarge total equity. After the two effects, the debt ratio will be lowered.