A Sweet Tooth for Dreyer's?

Shares of Dreyer's Grand Ice Cream (DRYR ) have been dripping--from 35 in February to 27 on Aug. 8--due to what some analysts describe as a "horrible" earnings outlook. On that basis, the stock is overvalued, argues John McMillin of Prudential Financial. But he insists that there is another way to look at Dryer's: It should trade higher because down the pike, Swiss giant Nestle is bound to buy the rest of the Dreyer's shares it doesn't already own. Nestle now holds 24% of Dreyer's after agreeing in early July to buy 3.4 million shares from General Electric Capital for 31.50 a share--higher than the stock's current price. Nestle could have bought shares much cheaper when the stock was down to 20 in September.

Its decision to buy GE's stake in July at a much higher price "marks a change of heart in Nestle's confidence in and commitment to Dreyer's business," says McMillin, who rates the stock a buy with a price target of 35, based on his 2002 earnings estimate of $1.35 a share. For 2001, his estimate is 55 cents a share.

Nestle's move "sends a strong signal" that it wants to acquire all of Dreyer's, McMillin says. True, a standstill pact bars Nestle from owning more than 25% of Dreyer's until 2004. But he sees this "long-term engagement" ending in a "happy marriage" for all, including shareholders. Of course, both parties could decide on an early wedding.

Charles LaLoggia, editor of The Superstock Investor newsletter, which focuses on takeover targets, says the buyout price should be at a substantial premium to Dreyer's current price.

By Gene G. Marcial

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