International Finance Case Study

(Group-1, Sec A) (1) Names of group members: Abhishek Singh (WMP6003) Abhishek Kumar (WMP 7005) Ankesh Goyal (WMP7012)

(2)

The case selected by the group: Dow Chemicals Bid for the privatization of PBB in Argentina

(3)

A brief synopsis of the case:

This case is about Dow Chemical Company bidding for the acquisition of Petroquimica Bahia Balanca (PBB) in Argentina. PBB produced both ethylene and Polyethylene and it is owned by Argentina government. Due to opening up of Argentina Economy the PBB had to bow directly compete with Brazilian Petro chemical producers but the Technology & Scale of PBB was not in line with International Standards. Hence, Argentina Government decided to privatize the PBB. On the other hand the DOW Chemical sees it as an opportunity to become the leading poly ethylene player in Latin America due to the favorable economic & political conditions in Argentina.

(4)

The questions around which the group would organize its analysis: Is the Copesul/Perez Company is the serious bidder of PBB? How to Finance the acquisition of PBB?

What are the relevant Political & Economic factors that are important in determining the country risk? What should be the Price to Bid for PBB?

What would be the complete valuation of the entire project in order to justify this investment by Dow Chemicals in Argentina?

Page|1 of 3

WMP 2011-14, T ERM 7

SUBMITTED BY- GROUP-1

P ROJECT REPORT INTERNATIONAL FINANCE S ECTION -A

Google:

Abstract What price should Dow Chemical bid for PBB, a petrochemical complex that is being privatized by the Argentine government? To answer this question, students are forced to consider the role of country risk, the underlying currency exposure of the business, and how to value an investment opportunity that has several stages. Given that it is a privatization, students are also forced to consider the political dynamics involved, the incentives of local managers, and the bidding process of a privatization. The case provides detailed cash flows and discount rate information, allowing students to conduct a thorough valuation for an emerging markets project. Case Analysis 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 Dows 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[1] $248.7 million for PBB. Calculating of present 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, the Net assets company of the company among are sufficient. investors. The acquisition will allow expanding profitable business in Latin America and increasing attractiveness of The two current competitors of Dow for this acquisition (Perez Companc S.A. and Copesul) dont currently meet the requirements of the bid because of the insufficient amount of net worth ($1.54 billion combined). Price is government bigger than $150 requirements: million,

- Dow currently has enough cash to accomplish the acquisition and offer the guaranty in favor of the

Page|2 of 3

WMP 2011-14, T ERM 7

SUBMITTED BY- GROUP-1

P ROJECT REPORT INTERNATIONAL FINANCE S ECTION -A

Its only 10 days left to offer price. If it is clear that there wont be any other bidders except for Dow and the two mentioned companies that dont 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. Salient Concepts Employed for Analysis Bids and Bidding; Privatization; Credit Derivatives and Swaps; Cash Flow; Emerging

Markets;Valuation; Business and Government Relations; Multinational Firms and Management; Risk and Uncertainty;Energy Industry; Argentina

Page|3 of 3