Rosario Acero S.A. Pablo Este

Rosario Acero S.A.

Pablo Este is currently considering expanding its business and increasing its production so that it can sell not only within Argentina, but also take advantage of the opportunities that the Mercosur free trade area offers. Investing in new equipment will also allow the company to become more efficient and productive, thus being able to be more cost competitive on the external market.

At the same time, Pablo Este is also looking towards continuing its run of profitable quarters and looks into the future to build the company even further.

These are several reasons for which the company is considering obtaining long-term capital. Long-term capital would allow it to develop the business in a sustainable manner and to not overburden its balance sheets with large short-term debts. Further more, there were also financial reasons: the company was envisaging to pay down the current working capital line of credit and thus reduce its short-term liabilities and to repay the long-term debt that would mature in 1997.

In order to obtain its long-term capital, the company currently has two alternatives. The first one involved a private placement of eight-year notes with two Spanish investment funds. This type of financial alternative involved a relatively high leverage, which increased the costs of the placement and brought in additional requirements from the investment funds, such as warrants. A second alternative was an initial public offering of the company, with shares being offered to the public.

Looking at economic and commercial issues, an IPO was highly dependable on public demand and the Mexican market had been, throughout the 1990s, a victim of several macroeconomic pressures, including a crash of the peso. This meant that the public may be reticent to risky ventures such as investing in stock and may prefer bank deposits as a way of investing their money. On the other hand, the private placement is disadvantaged by the relatively high costs of previous similar placements and by the fact that the company's relatively low revenues level may make it more difficult and incur more conditions from the investment funds.

From a financial point-of-view, 1997 shows a strong drop in the profit after taxes, mainly because of the apparition of a new financial burden in the form of the interest rate for the placement. At the same time, the interest expense for the old loans will decrease only slightly, not enough to match the new interest rate. This is why the company needs to expect this drop in profits. However, the profit after taxes will rebound in the next years, reaching a similar value to the one in 1996 in 2003 and growing even higher after that, with the revenues growing at an accelerated pace. The balance sheet follows similar conclusions. The EBIT/interest and the EBIT / (interest + amortization) drop significantly in the first year after the placement, but rebound quickly, reaching similar values in 1997 (for EBIT / (interest + amortization)) and 2000 for EBIT/interest. At the same time, the cash flow statement forecast shows revenues growing at an accelerated pace, mainly because of increased investments and increased efficiency and productivity.

On the other hand, the IPO shows more gradual drops in profit after taxes in the first year and values reaching $3.68 for profit after taxes in 2002, much higher than the placement option. The EBIT/interest grows at exponential rates to reach 81.14 in 2002, but the EBIT / (interest + amortization), is only at 2.48.

With both alternative sources of finance, the company faces some operational, economic and financial risks. First of all, the operational and economic risks need to be considered. Indeed, if the company is borrowing long-term capital and the investments it makes do not prove viable, then the financial burden of having to pay off the sums that it has borrowed will be too much for the company to support itself financially. The projected cash flows are optimistic, but one also needs to consider whether they are realistic or not. At the same time, an IPO is risky before the public may not be ready for it and the capital would eventually not be successfully raised. As pointed out, the Mexican market is still somewhat shaky and confidence in this type of financial ventures is still reasonably low.

Despite these considerations, an IPO at $9 would be a reasonable attempt. The main argument to support this is the fact that the company is part of a stable and developed industry, something that appeals quite a lot to the investors on the market. Further more, despite the competitiveness of the market, the steel industry is so tied into other economic sectors that one is always bound to see a sustainable demand existing on the market. The financial figures are also constructed with an IPO at $9 and they tend to reflect financial stability and economic growth in the estimates for the company in the next period of time.

The warrants and notes, however, in the placement offer, are somewhat restrictive and provide more advantages for the investment funds than they should. When the company is discussing an IPO at $9, actually having warrants that evaluate the share at $1 (40,000 shares) is significantly lower than what the company is worth on the market and an overwhelming concession that the company should not make. This warrant will also give the investment funds a significant stake in the company, even enabling them to be involved in some of the decision making processes.