Rosario Acero S.A. Pablo Este Research Proposal

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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.

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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.

Given all these considerations and the FRICTO framework, it seems that the IPO is the best alternative financing option that the company can use. The alternative is relatively risky, because it depends on the reaction of the market to the offer, while the placement is safe, because it is private and negotiated with the investment funds. At the same time, profit after taxes grows at a more significant rate in the case of the IPO, although the company will probably relinquish more control over its activity than in the case of the private placement with the investment funds. In terms of timing, the placement will probably take a smaller amount of time, especially since the deal is actually set up.

However, the placement is weak because of the warrants that the investment funds are asking for and which can significantly harm the company….....

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