The case is about Dow Chemicals’ bid for the privatization of Petroquimica Bahia Blanca (PBB). PBB, a producer of both Ethylene and Polyethylene in Argentina, is being privatized by the local government. Dow holds a leading market position in Ethylene and Polyethylene, and wants to utilize this opportunity to expand into Argentina. Dow has developed a three-stage operational strategy for expansion of its polyethylene operations in Argentina.
The acquisition of PBB represents the first stage of the strategy and provides a gateway to the second and third stage. The cash flows from each stage of the project have been valued using the discounted cash flow (DCF) approach. The discount rate for the valuation has been adjusted for the country risk premium, and a modified version of CAPM has been used to calculate a best case and a worst case estimate of the discount rate. This gives us a range of possible acquisition values for PBB.
Given that the acquisition also enables Dow to benefit from the from the high cash flows of the second and third stage of the project and that other parties are also interested in the acquisition, it is recommended that Dow bids a relatively high price of $280 million for PBB. Below is a free essay on “Dow Chemical’s Bid For The Privatization Of Pbb In” from Anti Essays, your source for free research papers, essays, and term paper examples. Dow Chemical’s Bid for the Privatization of PBB in Argentina Executive summary Dow Chemical Company is considering acquiring 51% stake in Petroquimica Bahia Blanca S.
A. (PBB) offered by the Government of Argentina. Acquiring PBB is the first stage of Dow’s project of expanding petrochemical business in the country. Dow is required to estimate how much it would offer to meet the requirements of the Argentinean State, overbid competitors but at the same time make the project profitable. The company should also take into account the country risk of Argentina because it is an emerging market with problems with exchange rates stability and freedom of capital repatriation. Dow should offer at least $248. 7 million for PBB. Calculating of resent value of the project allows for increasing the cost of capital (15%) in comparison with similar projects in US (8-10%). The bid will meet all government requirements: – Price is bigger than $150 million, – Dow currently has enough cash to accomplish the acquisition and offer the guaranty in favor of the Government, – Net assets of the company are sufficient. The acquisition will allow expanding profitable business in Latin America and increasing attractiveness of the company among investors. The two current competitors of Dow for this acquisition (Perez Companc S. A. nd Copesul) don’t currently meet the requirements of the bid because of the insufficient amount of net worth ($1. 54 billion combined). It’s only 10 days left to offer price. If it is clear that there won’t be any other bidders except for Dow and the two mentioned companies that don’t have enough time to come through all legal procedures to create new company and attract a partner with big net worth, Dow is advised to offer $150 for PBB making the NPV of the project bigger by $98. 7 million. Summary of facts: During the 1990s, the economy of Argentina started to recover after Carlos Menem took power…