Dow Chemical’s Bid for PBB in Argentina Essay

1. ( 5 platinums ) Using the values from exhibits 9. 10 and 11. a terminal growing rate of 0 % . and a price reduction rate of 20 % . what is the value of each of the three investing phases? 2. ( 30 platinums ) Describe the two most relevant factors ( merely those related to the fact that the acquisition is in Argentina and non in the U. S. ) that in your sentiment add uncertainness to those hard currency flows. Please list each factor with a short account of why it is relevant. whether it is a diversifiable hazard ( presume Dow’s investors are planetary ) and the likeliness that it will impact PBB. 3. ( 20 platinums ) For inquiry 3 please province which statement you agree with and why. The Numberss shown are at that place to supply an thought of sensitiveness. they are non precise and there is no precise reply to these inquiries.

That is. in the absence of much. much more information. there is no clear “right” reply ( though there are many “wrong” 1s ) . Your logical thinking is what matters most. Suppose that “today” is 1997 ( there’s nil peculiarly particular about 1997. I could hold chosen any other twelvemonth near 1995. the beginning of the rating ) . a. The sensitiveness of 1998 grosss. measured in US $ . to 1997 alterations in the Argentine peso against the dollar is such that: a. i. a 40 % devaluation of the Argentine peso would interpret into a 40 % autumn in gross. measured in US $ . a. two. a 40 % devaluation of the Argentine peso would interpret into a 20 % autumn in gross. measured in US $

a. three. a 40 % devaluation of the Argentine peso would interpret into no autumn in gross. measured in US $ . a. four. a 40 % devaluation of the Argentine peso would interpret into a 20 % addition in gross. measured in US $ . a. v. a 40 % devaluation of the Argentine peso would interpret into a 40 % addition in gross. measured in US $ .

B. The sensitiveness of 2010 grosss. measured in US $ . to 1997 alterations in the Argentine peso against the dollar is such that: b. i. a 40 % devaluation of the Argentine peso would interpret into a 40 % autumn in gross. measured in US $ . b. two. a 40 % devaluation of the Argentine peso would interpret into a 20 % autumn in gross. measured in US $ . b. three. a 40 % devaluation of the Argentine peso would interpret into no autumn in gross. measured in US $ .
b. four. a 40 % devaluation of the Argentine peso would interpret into a 20 % addition in gross. measured in US $ . b. v. a 40 % devaluation of the Argentine peso would interpret into a 40 % addition in gross. measured in US $ .

c. The sensitiveness of 1998 costs. measured in US $ . to 1997 alterations in the Argentine peso against the dollar is such that: c. i. a 40 % devaluation of the Argentine peso would interpret into a 40 % autumn in costs. measured in US $ . c. two. a 40 % devaluation of the Argentine peso would interpret into a 20 % autumn in costs. measured in US $ . c. three. a 40 % devaluation of the Argentine peso would interpret into no autumn in costs. measured in US $ . c. four. a 40 % devaluation of the Argentine peso would interpret into a 20 % addition in costs. measured in US $ . c. v. a 40 % devaluation of the Argentine peso would interpret into a 40 % addition in costs. measured in US $ .

d. The sensitiveness of 2010 costs. measured in US $ . to 1997 alterations in the Argentine peso against the dollar is such that: d. i. a 40 % devaluation of the Argentine peso would interpret into a 40 % autumn in costs. measured in US $ . d. two. a 40 % devaluation of the Argentine peso would interpret into a 20 % autumn in costs. measured in US $ . d. three. a 40 % devaluation of the Argentine peso would interpret into no autumn in costs. measured in US $ . d. four. a 40 % devaluation of the Argentine peso would interpret into a 20 % addition in costs. measured in US $ . d. v. a 40 % devaluation of the Argentine peso would interpret into a 40 % addition in costs. measured in US $ .

4. ( 10 platinums ) Based on your replies to oppugn 3.

a. What would Dow’s short-term net exposure to the Argentine peso be? B. What would Dow’s long-term net exposure to the Argentine peso be? c. If Dow wanted to fudge its short-term net exposure to the Argentine peso. what would it hold to make? Please supply three different options it could utilize to fudge that hazard and explain which 1 is likely to be the cheapest. d. If Dow wanted to fudge its long-term net exposure to the Argentine peso. what would it hold to make? Please supply three different options it could utilize to fudge that hazard and explain which 1 is likely to be the cheapest.

5. ( 30 platinums ) In visible radiation of what you’ve answered in inquiries 2 through 4 and other stuff from category. delight province whether the price reduction rate that Dow should utilize for this rating is larger. smaller. or the same as in the U. S. 6. ( 5 platinums ) Based on your old replies. should Oscar Vignart command for PBB. and if so. how much? ( Maximal 100 words. )

1. ( Exhibit 1 )
The first phase has a value for the 51 % of PBB of 160. 833 million of dollars. The 2nd phase has a value ( 100 % ) of 182. 62 million of dollars. The 3rd phase has a value of 92. 66 million of dollars.

The first job that involves a hazard factor for investors to Dow is political hazard. The economic and pecuniary policy implemented by the Argentinian authorities at this clip. in recent old ages has allowed the state to retrieve from a decennary of crisis and seems to work reasonably good. However. the hazard that these manoeuvres are counterproductive in the long tally is alive.

In that instance Dow suffer some jobs. In fact. most of the production in the three bowls and sold locally ( PBB 100 % . 89 % Polisur. 31 % of capacity due to the broadening of phase 3 ) and. if there were jobs due to the political instability. most of its current and possible clients ( formed by little and moderate-sized concerns that use POLYETHILENE to bring forth good consumer ) could fight and finally neglect. That would be a serious decrease in the borders of the Dow and in its hard currency flows.

The 2nd job is related to foreign exchange hazard. Sing this hazard factor should do some elucidations. For the minute the authorities is prosecuting a policy of currency pegging. for which the exchange rate and unnaturally set at 1. However. this status may no longer be sustainable. In this instance if it were abandoned is easy to conceive of the consequence it would hold on markets. seting in serious status. the Argentine economic system because of deficiency of assurance in its solvency and this would take to a crisp grasp of the dollar on the weight.

This state of affairs is non peculiarly influential on the budgets of 3 phases where Dow is traveling to put because both grosss and the variable cost ( about 90 % of entire costs ) are in dollars and merely a little sum of variable and fixed cost are in Peso. and anyhow with devaluation of Argentine currency would take to an advantage per Dow ( needed fewer dollars to pay in Peso. and those costs are slower to accommodate to new exchange rates ) .

On the contrary the negative consequence of the forsaking of the nog you would in Argentine petrochemical market. In fact. polyethilene monetary values are in U. S. dollars and with the devaluation of the peso ( the currency in which the participants downstream of Dow are cashing ) Dow’s Argentine clients could happen themselves in trouble to back up monetary values in dollars. which are international based. That would take to a extremist diminution in the profitableness of Dow. Finally. it is of import to stress that. besides selling outside the state. Dow would see borders worsen due to higher costs of transit and responsibilities. 3.

a. two. PBB Is cashing in dollars so a autumn of 40 % of Peso would non hold a direct impact of interpreting the hard currency flow of PBB into dollors. However PBB operates in Argentina. and its grosss are tied to the ability of its clients to purchase in dollars. With such a devaluation of the Argentine pbb clients may happen it hard to pay but it is said that everyone is unable to make so because they could be covered in the market for coins. pbb besides may travel and take advantage of the sum of unmet demand in Latin America.

However. this in a twelvemonth is non executable to perfection so a decrease in grosss of 20 % is predictable. b. three. The logical thinking is similar to that outlined above. However. in this instance one can conceive of that pbb reacted to the alteration occurred 3 old ages before or nevertheless that the state of affairs has changed. If the economic system has recovered. it’ll be exporting outside of Argentina for the sum of capacity can non be sold in Argentina. diminishing their borders because of the cost of export grosss. but maintaining to the degree in the instance of PEG. c. two. Talking about the good things are different costs. Even tough much of the costs are in U. S. dollars for pbb there is a portion of them that is paid in pesos.

It is portion of the variable costs and fixed costs. However a devaluation of the peso would be a addition for PBB. which. cashing in dollars. will change over fewer dollars to pay in pesos. As mentioned. nevertheless. this consequence would be taken with a non excessively significant portion of the costs of pbb. and besides it can be assumed that during the twelvemonth some of these costs are aligned in portion to the transition values ??before the write-down for an inflationary procedure. d. three. The logical thinking is similar to that described above. nevertheless. it is assumed that in the class of 3 old ages. the pecuniary costs of PBB align to those pre devaluation. therefore non leting to profit from the consequence devaluing.

a. the net peso short tally exposure is about the fixed cost. other variable cost and revenue enhancements. for an sum of ( EXHIBIT 1 ) of 116. 7 million of dollars. b. the net long tally peso exposure is 374. 22 million of dollars. c. to fudge a currency hazard the options are: forwards ( or hereafter ) contract options currency barter. The best options in the short tally are the forward. they are inexpensive ( no entry disbursal ) and really versatile.

To fudge the sum the merely have to come in in a contract of the opposite way of what they need. In this instance they have to purchase the entire cost in pesos ad the current exchange rate in dollars. Using options it would much dearly-won because of the option premium which has to be paid one time you entered in such a contract. Anyhow. because you will merely exert your right if it the exchange rate is favourable. they leave addition chances in exchange rates.

The currency barter doesn’t tantrum good the short tally exposure because of the length of such a contract and and the cost to be inside that sort of contract if there is non an existing debt. d. In the long term forward could be dearly-won for the premium that the controparty may set in the exchange rates ( they are commonly Bankss in over the counter markets ) . and because for long term the market could be illiquid. In this peculiar instance the long term are merely 3 old ages so utilizing forward could still be a good choise.

Options in the long term are non good because it is hard to happen in markets contract with such long run outing day of the month ( and demand day of the month in order non to incur in footing hazard ) and because you have to purchase several contract. Barter could be an thought. but as frontward don’t allow additions on favourable exchange rate ; a currency swaption ( option on a currency barter ) could be an thought. but looks dearly-won at clip of come ining in the contract.

The price reduction rate that Dow should utilize. should be higher than that used for measuring such an investing in the United States. This is due to the fact that the rate of between 8-10 % used in US incorporates a hazard premium relation to the U. S. market. which is different from that required for a similar investing in the Argentine market. In fact. looking at the public presentation of American and Argentine autonomous bonds. we see that the latter are higher than the U. S. . this difference is no more than the state hazard premium that an investor requires to put in Argentina compared to puting in the U. S. . this spread can be introduced into the computation of the value of the right price reduction rate utilizing the undermentioned expression:

Keu is identified with the unlevered cost of capital. or the return required to put in certain plus category. With rf the riskless return to us. ?u with the unlevered beta for the sector ( fictile and specialised chemicals ) with rm the market return and cpr state hazard premium. Now. in the specific instance under probe in research on international databese you identify that the unlevered beta of the sector is close to the unit.

You can besides add that in the long term all beta nearing market beta ( as a effect of the Efficient Market Theory that states that as all information becomes known. the market will settle to its proper degree as everyone will be able to do right picks ) . and hence since our beta in databese is equal to one. the hypothesis of adjusted beta merely reenforce this premise. So in this peculiar instance it can be assumed that the state hazard premium can be merely added to the price reduction factor used for an American investing. The job is now right measuring the market hazard premium. You can see from the exhibits proposed ( Exhibit 2 ) that in recent old ages. with the PEG CPR has fluctuated around an norm of about 700 footing points.

Despite the markets already incorporate the possible forsaking of the nog and its causes is non hard to believe that if that happened the “cpr” suffer a considerable spring and this estimation might be non prudent. but we must retrieve that the market is non merely Argentina in the presented 3 phases. and potentially due to the increased demand in Latin America ( exhibits 3 ) . Dow could be exported elsewhere. A Cardiopulmonary resuscitation of around 5-7 % is so sensible. for a entire price reduction rate between 13-17 % .

By utilizing the rate of growing proposed in the instance of 3. 3 % per annum and a price reduction rate of 16 % . the NPV of 51 % of PBB is of U. S. $ 207. 476 million. This sum is non nevertheless the correct the monetary value of the command. Just the hard currency flows are non plenty to measure the right monetary value to offer the Argentinian authorities. As first analysis the two rivals do non look serious bidder in the auction because they do non run into the petition of combined 5 billion net worth.

There are still 10 yearss at the shutting of the auction and if they win caming frontward with a capital addition conveying their combined wealth over 5 billion. so Dow should besides see the fact that it can profit non merely the hard currency flows of PBB but besides those of the 3 phase of the undertaking. which provide in portion an addition in production capacity of PBB and particularly of its efficiency.

A monetary value around $ 300 million should maintain out other possible bidder. which they can non make the advantage of being the chiefly argenitian manufacturer. However. this scenario is non believable given the close smebra runing times were rivals to run into the demands of the authorities. so the minimal stake petition for $ 150 million should be sufficient and would let Dow bring forth a important positive NPV. 150 finally is finally the value to offer.