Case: Dow Chemical

Case: Dow Chemical

* Questions:

1. Introduction to the Case

2. How would you convince Dow headquarters to invest in this project?

3. How would you conduct a valuation of this project?

4. What would you bid for this project?

1. Introduction to the Case

November 10, 1995, Oscar Vignart, vice president of business development for Latin America for Dow Chemical Company (Dow), and Luis Marcer, CFO of Dow Quimica Argentina, considered the bidding price on Petroquimica 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. 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 to incorporate Argentina's country risk into their model. 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.

Critical success factors in the polyethylene business are:

* Large plant sizes as large plants offer significant economies of scale

* Vertical integration as a result of the highly integrated production process

* Stable supplies of ethane of naphtha to support the highly integrated process sand to allow for operating rates near 100%

* Ethane as input

* Low transportation cost including duties and levies as a result of the commodity product nature and the narrow price brand of polyethylene.

* High global capacity utilization, as prices and profit margins are closely linked to the global operating rate i.e. industry overcapacity.

* Technology...