CAIRO: “Citadel Capital is quite a story, Ahmed El-Housseiny, managing director of the $7 billion private equity firm, told Daily News Egypt in an exclusive interview.
Egypt’s Citadel Capital was born of a vision to revive businesses in distress by providing them with financial, technical and legal support, developing their capacities and, in turn, increasing their value.
While the concept is relatively new to the Egyptian market, Citadel Capital was able to become the leading private equity firm in Egypt, controlling investments worth more than $7 billion in industries including oil and gas, cement, mining, retail and food.
Citadel entered the regional playing field in 2003, when Hisham El-Khazindar joined Ahmed Heikal – two former senior executives and shareholders in Egypt s largest investment bank, EFG-Hermes – to create a private equity firm.
Their initial capital was only LE 2 million, but just 18 months after launching, they lured $2.8 billion in investments from four new partners: Karim Sadiq, Marwan El-Kady, Ahmed El-Housseiny and Ahmed El-Shamy “At that time, we all independently reached the conclusion that the region and Egypt were ready for a private equity firm, El-Housseiny said. Most of the partners brought with them extensive experience in investment banking, and the company was ready to take on the market.
“The region was right for private equity and the reasons were the intersection at that point of time between the availability of liquidity in the GCC and the availability of opportunity in the industrial economy in Egypt, he said.
The managerial capabilities needed for such an endeavor were available due to the presence of multinationals and private businesses since the early 90s. “Private equity fed on those managerial calibers that had a good 10-15 years of experience under their belt, he said.
Coming out of a recession period and with a new cabinet being sworn in, Egypt’s market was ripe for such an investment. “At that time a number of interesting opportunities unveiled and we were working on several transactions, a few of which materialized, he said.
El-Housseiny distinguishes Citadel from other private equity companies by saying that the secret to their success is realizing that “this is a people’s business.
“If you look at any industry you’ll find that invariably corporations have assets, in private equity we are nothing but a few people who put their minds together and work well as a team to produce ideas and execute our strategies and create value for our shareholders, he said.
Citadel Capital sees potential in four kinds of transactions: distress turnarounds, consolidations, green fields in relevant industries and leverage buyouts. “There may be one or more rational for us to eye a company, he explained.
In distress situations, the key factor is the viability of the business, meaning that it is dealing with the right product, in the right market, and that it is in demand. The absence of these factors is fatal, he said, and “no matter who ran the business there is nothing you can do.
“We don’t necessarily wait for a company to go bankrupt. What is key to us is the quality of the assets, the quality of the business proposition, the industry, the product, the edge – these are really the long-term keys to success. If these are there and you have a bit of financial misstructuring or technical downturns, this is all within the realm of doable repairs, he explains.
Globally, reasons for distress range from mismanagement to faulty capital structuring. However, Egyptian businesses have recently suffered for other symptoms. “One of the main reasons behind company distress is the banking sector. The bank’s failure to filter good from bad projects has led to a disproportion. I think that has been addressed by the restructuring of the banking sector in the past few years, he said.
Buying out the waning ASEC group, owner of Helwan Cement, was Citadel s first deal and a good 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. ASEC also operated 12 million tons of cement for third parties.
With a $38 million loan from Barclays Bank and mezzanine financing from friends and family, Citadel Capital made its first acquisition. Bringing new blood into ASEC’s management team and kicking off a financial restructuring program, Citadel offered a private placement of Helwan Cement which raised capital.
Meanwhile, ASEC sold a portion of its stake in Helwan to off its loans and restructure its finances.
The funds went towards restructuring ASEC Group, Helwan Cement and other group holdings that were technically bankrupt. That, in turn, bolstered Helwan Cement’s share price, which steadily gained as investors saw the company’s health improving.
Within six months, the stock price doubled to LE 30. Citadel then sold the 70 percent that ASEC still owned in Helwan Cement to Suez Cement. By that time, Citadel had increased its stake in ASEC to 60 percent.
With Suez Cement acquiring 100 percent of Helwan at LE 30 a share for a total $600 million, ASEC took a 70 percent cut worth almost $400 million. Sixty percent of that went to Citadel Capital, which translated into $250 million on an investment worth $12 million.
With the proceeds from the sale, Citadel created a new company under ASEC called ASEC Cement Holding, with a capital of $320 million. ASEC owned a 51 percent stake while Citadel and other investors took the remaining 49 percent.
“ASEC Cement Holding is doing fantastic. The business was initially started to build and acquire cement capacity around the region. .We acquired an asset in Egypt and in Algeria and we are in the advanced stages of building a cement plant in Sudan. We [also] have licenses to build plants in Syria and Libya, he said.
“We plan to continue building more cement plants across the region. We look at frontier markets, ones that have a supply gap, rely on local consumption and are augmented by the export play into the southern European basin, he said.
Unlike Western economies that often lay off employees in distressed companies, Egypt follows a different strategy. Since labor costs are not a large portion of company profits and losses, it is not essential for private equity firms or financial investors to cutback employees in favor of increasing shareholder value.
Read Part II of Daily News Egypt’s interview with Ahmed El-Housseiny on Monday July 21.
