Dow Chemical Company

Dow Chemical Company is a leading manufacturer of chemicals and plastics. They have been expanding globally by building petrochemical complexes in emerging economies. In 1995, Dow had 94 plants in more than 30 countries. Dow has been interested in expanding its interests in Argentina because of the natural attributes of the region. Oscar Vignart, Dow’s vice president for business development in Latin America, believes that there will be continued improvements of the standard of living in Argentina, which will lead to increased demand for polyethylene.

Petroquimica Bahia Blanca (PBB) is being privatized by the Argentine government. They are an Argentine producer of ethylene and polyethylene. The expected growth in polyethylene demand has made PBB a very attractive acquisition for Dow. Oscar Vignart, vice president of business development in Latin America for Dow Chemical Company and Luis Marcer, CFO of Dow Quimica Argentina are considering bidding for PBB.

Marcer and Vignart have come up with base case cash flows for the valuation of PBB, but are wondering which country specific risks could impact the project. They are also debating over how much to bid for PBB. Based upon the current condition of Argentina, I believe that Dow is subject to 4 risks: corruption risk, inflation risk, information risk, and currency risk. Taking into account these risks, the cash flows and discount rate have been adjusted to better determine the value of the bid.

Given the cash flow projections I believe that it would be in the best interest of Dow to try to acquire PBB. Because of the growing demand of polyethylene in Argentina, Dow has the opportunity to capture a large market share. After doing a discounted cash flow analysis, I believe that Dow should bid $291.99 million for the acquisition of PBB. This will be a fair bid given the current and future economic conditions of Argentina.

Statement of Problem

Dow Chemical Company is considering bidding for the acquisition of PBB. Dow has built cash flow projections for the project and now is trying to figure out how to incorporate Argentina’s country risk into their model.

Analysis

Based upon Dow’s estimated cash flows, a base case valuation will be determined first (see Exhibit 1 for base case cash flows):

• Using the sovereign spread model, a base discount rate of 19% will be