Rosario Acero S.A
25 Pages Posted: 21 Oct 2008
In March 1997, the board chair of this small steel mill is pondering how to finance the growth of his firm: either with an initial public offering of equity or a private placement of 8-year senior notes with warrants. The task for the student is to sort out the comparative advantages and disadvantages of each alternative—including valuing the possible securities—and recommend a course of action.
ROSARIO ACERO S.A.
In March 1997, Pablo Este sat in a comfortable chair in the living room of his home in Buenos Aires, reflecting on the future of the small steel mill he owned. The initial years of Rosario Acero S.A., the former Rosario Works of Giganto Acero S.A., had been one challenge after another—the divestiture of Rosario from Giganto, downsizing the operations and workforce, searching for new customers during the six-month Giganto Acero strike at a time when sales to Giganto Acero accounted for nearly half the company's total sales, and arguing with local bankers over the value of receivables due from customers facing possible bankruptcy.
Now, after six profitable quarters, the company prepared to issue its first long-term securities since its incorporation in 1993. The concern that Este faced in March 1997 was the type of capital to acquire. The company's size—revenues were below $ 35 million pesos—definitely limited options, but Este, as majority shareholder and board chair of Rosario Acero S.A.'s board of directors, wanted to consider all the options available at the time.
Este had engaged Raul Martinez, an independent financial consultant, to investigate a private placement of eight-year senior notes with warrants. Martinez's initial report stated that Rosario Acero S.A. could raise its required $ 7.5 million at a coupon rate of 13%. Another option Este was interested in evaluating was an initial public offering of Rosario Acero S.A.'s stock through a local investment bank. And perhaps now was the time to sell the entire company to another firm.
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Keywords: initial public offering, private placement, voting paradox, debt financing, warrants, valuation
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