Rosario Acero S.A.
Synopsis and Objectives
In March 1997, the board’s chair of this small steel mill was pondering how to finance the growth of his firm: either with an initial public offering (IPO) of equity or through a private placement of eight-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 then recommend a course of action.
These are the objectives of this case:
Survey the main considerations in the basic choice between debt and equity financing. The case allows an application of the classic FRICTO (flexibility, risk, income, control, timing, and other) framework, as well as an opportunity for students to exercise their valuation skills. Consider the impact of financing on the value of the firm. The financial models permit the firm to be valued under alternative financing strategies. Explore issues in financing the privately owned firm regarding voting control, the decision to go public, and the role of private-placement financing.
Study Questions for Advance Assignment to Students
Why is Pablo Este considering obtaining long-term capital? 2.
How will the two financing alternatives affect the performance of the firm? Please examine the financial forecasts contained in Exhibits 6 through 11 in the case. 3.
What are the principal risks the firm faces? Under some reasonable downside scenario, could Rosario Acero continue to service its debt? 4.
From Rosario’s standpoint, are the terms of the notes and warrants package competitive and/or attractive? 5.
As for the possible equity issue, would an offering price of $9.00 per share be fair? 6.
Which course of action should Este adopt? In preparing your recommendation, use the FRICTO framework to identify the trade-offs between the two alternatives. (FRICTO stands for flexibility, risk, income, control, timing, and other.)
Student preparation of this case is supported by Case_32.xls, a Microsoft Excel spreadsheet file containing models underlying Exhibits 6 through 12 of the case. The instructor’s preparation is supported by TN_32.xls. Please do not share the instructor’s file with the students.
Hypothetical Teaching Plan
The following is an outline of possible discussion leadership questions. The instructor could begin with a cold-call request for recommendations from one student and then embark on a broader development of the case issues as follows:
How well has Rosario Acero done? How profitable has been the investment to Pablo Este? What are his motives for seeking outside capital? 2.
What are the comparative advantages and disadvantages of the two financing alternatives? 3.
Do you think that Rosario Acero S.A. will be able to issue new shares of common stock at $9.00 or more per share? 4.
What is the effective cost of the units of notes and warrants? 5.
How do the two alternatives compare in a FRICTO analysis? What should Este do?
The instructor could close the discussion with a vote between the alternatives and some comments on the decision analysis of the financing tactics. Case Analysis
Rosario Acero’s situation and investment return to Pablo Este
Three-and-a-half years into his investment in Rosario Acero, Pablo Este can look back at the significant transformation within the firm. The firm has weathered the strains of a divestiture, downsizing, industry turmoil, and a search for new customers. As recently as 1995, the firm lost money before extraordinary items, due to this turmoil. Now, it appears that the firm is on more stable footing and can reasonably approach the capital markets for long-term financing. Este has reason to feel satisfied with his investment to date in Rosario Acero. The case states that he and his partners committed $0.25 million to purchase the equity of the firm in July 1993. Assuming that the equity of the...
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