The joint venture speculation between Reliance Industries and Dow Chemicals for Dow's underperforming commodity businesses could cost Reliance anything between $15 billion and $21 billion for a 60 -100 per cent stake.

Citigroup values Dow's commodity business at a normalised valuation of $21.5 billion, plus a control premium that an acquirer would pay to get a controlling stake.

Assuming a 15 per cent premium, the commodity assets could be worth $24.8 billion for 100 per cent ownership. A 60 per cent ownership in joint venture by the acquirer would result in a pre-tax valuation of roughly $15 billion.

The valuation estimates for Dow's commodity business is based on valuation that Huntsman recently got for Wilton (6x EV/EBITDA), UK ethylene asset, while 5x for its higher cost US assets. Citigroup ascribes 7x EV/EBITDA multiple for Dow's assets because:

1.  They are lower cost and flexible assets
2.  They have a global position
3.   There is good vertical integration

Citigroup Indian analyst, Rahul Singh, thinks that cash-rich Reliance could be looking to expand beyond India, into western markets. Dow has been unable to unlock the full value of its commodity business because of rising raw material cost.

The long-term plan would be to transfer manufacturing from high-cost locations in the US and Europe to India, specifically Reliance's industrial zone in Jamnagar, Gujarat state.

This way, Dow would be able to gain strategic access to low cost raw materials via its partner, while Reliance would benefit from Dow's strong global customer base, advanced technology and established bases in the world's developed markets.

Citigroup believes that although the deal is complex, if executed, it would be seen as a positive for Dow because investors have been waiting for Dow to take some action on its "asset light" strategy, which Dow has been expounding for about a year now.

Dow Chemical (DOW) is the largest chemical company in the US, and the second largest chemical company in the world. Dow has a diversified portfolio in commodity plastics, specialty plastics, chemicals, and agricultural, with products that include polyethylene resins for packaging, fibers, and films, as well as performance chemicals such as acrylic acid for producing other functional ingredients.