The managing director of Citadel Capital tells Sherine Abdel-Razek how a company he co-started four years ago with a capital of LE2 million now manages $7 billion in investments Conventional wisdom would say that a distressed or loss-making company could never be a good investment. But there are exceptions to the rule, as seen through the eyes of companies in the private equity business. These companies specialise in buying distressed or small companies, give them financial, technical and legal support, develop their capacities and up their value. Once they become profitable standalone entities, the private equity investors exit by selling part or all of the company and use the revenues to buy and support other firms. While the concept is relatively new to the Egyptian market, it appears optimum in an economy where many companies suffer from debt and mismanagement. Citadel Capital is a private equity firm which may be the best performer and most prominent in Egypt and the region, controlling investments worth more than $7 billion in industries including oil and gas, cement, mining, retail and food. "What we are really good at is identifying opportunities in companies, helping them grow from one stage to the next, and preferably turning them into regional players before making a timely exit," states Citadel Capital's co-founder Hisham El-Khazindar. His company is unlike other private equity firms in the region which act as investment funds by buying minority shares in companies, and then becoming passive investors hoping the new money flow will create value. "Our philosophy is different," says El-Khazindar. "In all our deals, we want to be an active investor, an investor who comes in and takes control of the company and helps it change direction and vision." Citadel usually buys majority stakes in companies, attracts the right people to operate them, provides them with the financial muscle to grow, and uses its relationships across the region to identify growth opportunities for these companies. In addition, Citadel invests in the companies' workers as well: "we are believers in stock options and stock ownerships for management and employees," asserts El-Khazindar. "In all our acquisitions, we adopt such plans not only for the senior management but also the employees since this is the best way to align interest." The idea of Citadel Capital was born in 2003 as the brainchild of El-Khazindar and Ahmed Heikal, two former senior executives and shareholders in Egypt's largest investment bank, EFG-Hermes. At a time when the country was just coming out of recession and a new reform-minded cabinet was sworn in, they believed there is room for a large-scale private equity business. "While Egypt has always had tremendous potential, it was clear to us that this is a government that may do the right moves to unleash that potential," according to El-Khazindar. On the one hand, multinationals were pouring investments into the country and the economy was once more gaining momentum; on the other, there were mid-sized Egyptian companies not realising their full potential because they were constrained by their size. "We not only saw a good investment opportunity by capitalising on a growing economy, but also a need for private equity players to come in, invest in those companies, provide them with financial support, vision, the ability to attract more talented management, and with a scope to expand not only in Egypt but across the region," adds El-Khazindar. While Citadel Capital launched in 2004 with a capital of LE2 million, it only took El-Khazindar and Heikal 18 months to promote their business model and attract new partners and investors -- raising its value to $2.8 billion. Buying the loss-making ASEC group, owner of Helwan Cement, was Citadel's first deal and a typical example of their business model. The ASEC group built most of the cement factories in Egypt over the past 20 years, and had good experience in building cement plants at a low cost. Moreover, ASEC operated 12 million tonnes of cement for third parties. It took the Citadel Capital team almost one year to study the strengths and weaknesses of ASEC, so by the time they bid for it they had a very good understanding of the group's status. "The family that owned ASEC was talking to multiple buyers at the time, but decided to sell to us because of the homework we had done," recalls El-Khazindar. "We were able to submit an offer with very few conditions." Citadel bought a 60 per cent stake in ASEC for $52 million. According to him, ASEC was a highly distressed group of companies which were badly hit by the recession, stripping the group of the ability to meet financial obligations. ASEC was over-leveraged since it borrowed large sums from banks, and in El-Khazindar words was "technically bankrupt". While it had "fantastic" technical management, there were many flaws in different managerial systems such as financial controls and reporting. Hence, Citadel's first move was complementing the efficient technical management with a new managerial team in finance, legal and human resources, followed by overall financial restructuring. Since Citadel needed cash to deal with ASEC's liabilities, it decided to sell part of ASEC's stake in Helwan Cement -- already a listed company -- through a private placement in March 2005. Subscribers in the offer paid LE17 per share and ASEC was able to raise LE450 million that were entirely used to repay and reschedule the company's loans. This was great news for the lending banks, especially the National Bank of Egypt and Banque Misr which had previously written off ASEC's debts because they did not see any chance of future settlements. ASEC owed LE800 million to Banque Misr alone. In time, the financial and managerial restructuring started to bear fruit. ASEC's consolidated results in 2004 were LE200 million in losses; by the first quarter of 2005, after the private placement, it was clear to Citadel managers that if things went well the group will realise LE150 million in profits in 2005. In June 2005, Citadel looked for a way to capitalise on ASEC's efficient technical management. "We wanted to use its expertise in building and operating cement plants around the region in countries that have similar advantages, like Egypt's cheap labour, abundant raw materials and low cost energy, as well as being close to Europe as an export market," says El-Khazindar. Algeria and Libya fit the bill, but also Sudan, Ethiopia and Syria -- which don't have such competitive advantages but are fast growing markets with large deficits in cement production -- could be lucrative investments. Selling Helwan Cement was the optimal strategy to raise the funds needed for such expansion, and media headlines at the time praised the good deal ASEC finalised. "Helwan was a four million tonne cement plant," remembers El-Khazindar, "and because it was an existing operation, cleaned up and back to profitability, we were able to sell it to Suez Cement at a valuation that implies $250-300 per tonne -- almost 1.5-2 times the average price in such cases." Overall, Suez Cement paid $580 million for Helwan, in which ASEC held a 70 per cent stake. Having a portion of 60 per cent in ASEC, Citadel's share of the deal reached almost $250 million. "We sold Helwan because in the private equity game, you sell when it makes sense to exit as the value has already been created," asserts El-Khazindar. Citadel also had a long-term plan concerning regional expansion, and ASEC now has existing and under construction cement plants in Sudan, AlgeriaLibya, Syria, North Iraq, Egypt and Ethiopia. "When all these plants start operating with full capacity, ASEC will have a total capacity of 20 million tonnes by 2012," he boasts. El-Khazindar concedes that, "we were lucky to have ASEC as our first deal. We made profits; we saved a company that was almost going bankrupt; we saved almost 5,000 workers; in addition to repaying bank debts. Most importantly, it gave us a good track record." While subscribers in the capital increase at LE17 per share sold their stake six months later at LE30 per share, investors partnering with Citadel to buy ASEC realised almost 300 per cent profit on their initial investment. Citadel's second deal was a completely different type of transaction. In July 2005, the company outbid international giants and bought the Egyptian Fertilisers Company (EFC) for a whopping $740 million -- making it the largest private equity transaction at the time. "Unlike ASEC, EFC was a profit-making and very well managed company operating in the fertilisers sector," notes El-Khazindar. "This was a sector we felt Egypt and the region have competitive advantage in, since this industry needs gas and certain raw materials which many countries in the region have in abundance." EFC was able to double its production capacity within 18 months, and it expanded regionally when Citadel negotiated on behalf of EFC with the Algerian government to build a green field fertiliser company. Moreover, it acquired a 20 per cent stake with joint management control in the only Sub Saharan African Fertilisers Company in Nigeria. "EFC had a great management team, but lacked the vision to expand," according to El-Khazindar. "What we did was to open the door for these opportunities." EFC's 2004 results showed $60 million in profits; by the beginning of 2007, it was expected to realise $180 million. Although investor interest in EFC began to rise in 2006, it was not until the second quarter of 2007 that Abraaj Capital made a serious offer. In early 2007, Citadel had been operating for 3.5 years during which time it had raised and invested almost $3 billion in Egypt and the region. "Our shareholders wanted this to be translated into profits in their hands," states the company's co- founder. "We needed to show our investors some value, so we decided to sell EFC to Abraaj for almost $1.4 billion." In addition to overhauling or improving the bottom line of companies, Citadel's investment categories include setting up new green field projects, such as the National Petroleum Company (NPC). Looking at the upstream oil and gas sector in Egypt, the Citadel team and consultants found that there are either large multinationals or small-sized local companies in this sector. El-Khazindar believes that Egypt is no longer a priority for oil multinationals since they feel that the large oil discoveries have already been uncovered. As for the small operators, he continues, they don't have the financial clout to take risks on new explorations or spend money upgrading existing fields -- especially at locations where reserves are not easy to extract. Capitalising on this gap, NPC was formed at a value of $250 million and began operations by acquiring a small local operator with good management and a small oil field. Citadel continued to build strength around its latest creation and bought more existing fields, including a small field from British Petroleum. Moreover, NPC bought many fields in bid rounds from the Egyptian government, and is also getting concessions in Sudan and looking at other places in the region like Iraq and Nigeria. When it launched, NPC was producing 600 barrels a day, and it is projected that by the end of 2008 NPC will be producing 30,000 barrels per day -- Egypt's entire oil production is 600,000 barrels per day. NPC's capital was increased last summer, and for $900 million it bought a Canadian company called Rally which owns four fields in Egypt and Pakistan. Out of all the multi-million dollar deals under Citadel's belt, ASEC is El-Khazindar's favourite. "I am very proud of the ASEC deal; it was a win-win situation for investors, banks and workers," he remembers fondly. "And the story is not yet over. The real story will be in 2012 when our vision of turning ASEC into a regional cement player materialises." Even then, it may not be the end of the story, adds El-Khazindar, "maybe by then we will have plans to turn it into a global cement player."
