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| | Mukesh Ambani might end up paying an enterprise value of anything between $6 billion and $7 billion (Rs 26,000-31,000 crore) for getting a stake in the commodity plastics business of petrochemicals giant Dow Chemical.
Dow may spin off its basic plastics business into a joint venture with Ambani’s flagship, the $20-billion Reliance Industries, according to unconfirmed reports. When contacted, a Dow spokesperson said, “It is not our policy to comment on speculation”. But he added that Dow is “continually looking at investment opportunities and potential ventures around the world.” Reliance Industries declined to comment. | Dow has more to gain… | | The deal makes immense sense for Dow, which wants to transfer its low-margin commodity plastics businesses into joint ventures, and focus on its high-margin businesses of speciality chemicals and plastics. |
Dow Chemical has a market cap of $41 billion, and at $11.83 billion, the basic plastics business accounts for less than a quarter of Dow’s turnover of $49 billion. Reliance Industries is eyeing a strategic stake in Dow’s plastics business. Dow’s market cap is 0.84 times its sales. As the commodity plastics business is a low-margin game, analysts say the valuation of this business should be lower than that of the whole company, not more than $6-7 billion. Analysts tracking the Reliance Industries stock, however, are not clear how it will benefit by acquiring Dow’s commodity plastics business. "The success of the deal would depend on the ability of the venture’s partners to reduce costs. You cannot possibly transfer the manufacturing facility to India. What will they do with the plants in the US? We have not been able to understand what the benefits are, unless Reliance gets the assets for a song," said an analyst with an foreign institutional investor who did not wish to be identified. The concern is because most of the costs are in feedstock price (naphtha), which fluctuates depending on the price of crude. Although Reliance Industries’ naphtha cracker is among the most efficient—analysts estimate Reliance’s net back margins on ethylene, inclusive those on propylene, to be around $700-750 per tonne—Dow’s margins are not known. The alliance could give Reliance access to markets and technology—but again, analysts say it hardly needs help in marketing. But over time, the venture could become a captive customer for Reliance Industries’ plastics, if it decides to shift production to low-cost locations like Jamnagar. Email author: ranju.sarkar@hindustantimes.com |
