Dow Chemicals

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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.

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      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...
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