Dow Chemical’s Bid for the Privatization of PBB in Argentina 2) Descriptions of

Question

Dow Chemical’s Bid for the Privatization of PBB in Argentina

2) Descriptions of ethylene and polyethylene business,

3) What are the drivers of profitability in this business?

4) Description of the project (What is Dow bidding for? Which cash flows should be valued and why?)

5) What are the critical risks associated with major investment in an emerging market like Argentina?

6) **How would you incorporate the risks in Q5 into the project evaluation? Please comment on the advantages and disadvantages of the suggested strategies which must include discount rate adjustment strategy and cash flow adjustment strategy.

7) **Evaluate the cash flows provided under different scenarios. Note that Dow uses 8%-10% to evaluate similar project in the U.S.

8) **Would you add a country risk premium for doing business

Explanation / Answer

2. ethylene and polyethylene are products of cracking process using naptha molecules or ethane molecules. Ethylene is produced from oil or natural gas. Ethylene is used to produce polyethylene.

PBB made ethylene and polyethylene in a petrochemical complex located 700 km south of Buenos Aires. PBB had one cracker and one polyethylene plant. Production started in 1982.

3. Drivers of profitability:

The cost of raw materials for ethylene and polyethylene is a key factor in profitability. The raw materials are crude oil heavies or natural gas liquids. The prices of these materials fluctuate in the global market depending on the demand and geo political risks.

Second driver is demand from industries like packaging, trash bags, milk jugs etc.

The main driver was the global operating rate and economies of scale.

4. Dow is bidding for privatization of PBB in Argentina. Dow was considering acquiring PBB to become a leader in the polyethylene business in Latin America. The cash flow arising from polythelene consumption in Latin America should be considered. These cash flows should be discounted with the country risk of Argentina.

5. Risks of investing in emerging market like Argentina - the first risk is that growth case scenario (the bull case or the best case) may be not practical in case of emerging markets. Any slowdown in the economy will have a big impact on all capital industries including the ethylene and polyethylene business. Any change in Fed rates in the US may also affect the economy of Argentina, due to lack of access to international financial markets.

(Kindly post the questions 6,7,8 as a seperate question.)

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