REV: MARCH 31, 2006
MIHIR A. DESAI
Dow Chemical's Bid for the Privatization of PBB in
On November 10, 1995, Oscar Vignart, vice president of business development for Latin America for Dow Chemical Company (Dow), and Luis Marcer, CFO of Dow Química Argentina, considered the bidding price on Petroquímica Bahia Blanca S.A. (PBB), which was being privatized by the Argentine government. PBB produced both ethylene and polyethylene. It was part of a petrochemical complex located in Bahia Blanca, 700 kilometers south of the Argentine capital, Buenos Aires.1 Vignart believed that the acquisition of PBB offered Dow a once-in-a-lifetime opportunity to become the leading polyethylene player in Latin America.
Vignart and Marcer had reviewed Dow headquarters’ projection of polyethylene consumption in Latin America and had built cash flow projections for the project. They now had to incorporate Argentina’s country risk into their model. While Vignart thought that Argentina’s current political and economic conditions favored the investment, he also recognized that there were many uncertainties about the project which he had to address to justify the investment to the parent company. With the offer price for the privatization due in 10 days, there was little time left to finalize the valuation and make a decision on the project.
Overview of the Ethylene and Polyethylene Industries in 1995
Ethylene, produced from oil or natural gas, was used to produce polyethylene, the world’s most widely used plastic. Polyethylene accounted for approximately three-quarters of ethylene demand. Polyethylene plastic’s principal application was in packaging, from trash bags to milk jugs.
Ethylene plants, known as hydrocarbon “crackers,” separated either naphtha molecules (derived from crude oil) or ethane molecules (derived from natural gas).2 The ethylene derived from this process was used to produce polyethylene (Figure A).
1 In the case, PBB refers to a set of assets that included PPB’s stake in Indupa, S.A.
2 “Cracking” described a refining process whereby large, complex molecules were broken down into smaller molecules with a
lower boiling point and then formed into new, lighter, higher-value compounds. ________________________________________________________________________________________________________________
Professor Mihir A. Desai and Alexandra de Royere, Senior Researcher at the HBS Latin America Research Center in Buenos Aires, prepared this case with assistance from Gustavo Herrero, Executive Director of the LARC, and Mark Veblen and Kathleen Luchs, Research Associates. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Selected data have been disguised to protect confidentiality. Copyright © 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
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Dow Chemical's Bid for the Privatization of PBB in Argentina
Production of Ethylene and Polyethylene
Others (e.g., Ethylene...