Private equity: Citadel Capital restructures for a new start

By:
Dominic O’Neill
Published on:

State approves $525 million capital raise; Move to longer-term, majority stakes

Citadel Capital – until recently billed as Africa’s largest private equity firm – gained regulatory approval for a key capital increase last month, which it hopes will transform its business model. It is Egypt’s largest share issuance since the 2011 revolution, says co-founder and managing director Hisham El Khazindar.

Khazindar says Citadel had been waiting since November for approval for the E£3.64 billion ($525 million) sale. He now expects to complete the transaction, which will involve co-investors and limited partners swapping shares in Citadel’s portfolio companies for shares in Citadel itself, by the year-end.

Citadel Capital's co-founder and managing director Hisham El Khazindar
Citadel Capital's co-founder and managing director Hisham El Khazindar
It adds to the more positive mood of some financiers in Egypt after the arrival this summer of a new administration, including finance minister Ahmed Galal: a World Bank veteran, who replaced Islamic finance expert Fayyad Abdel Moneim. The stock market has risen 12% in the three months following the July 3 coup.

"The timing [of the approval] should be viewed in the context of changes being implemented by the interim government," says Khazindar. He points in particular to the appointment of a new chair of the Egyptian Financial Supervisory Authority, Sharif Sami, in August.

"The Egyptian government was unfortunately paralysed during [deposed Islamist president Mohammed] Morsi’s administration," he says. "The machinery of government has got going again."

Deleveraging and strengthening the balance sheet, according to Khazindar, the capital increase is also a crucial part of Citadel’s shift away from private equity and towards a strategy he says is more suited to the post-revolutionary business environment.

Citadel is listed in Cairo and controls investments in north and east Africa totalling some $9.5 billion (it has some $300 million of senior debt to local and international banks including Citi, according to Khazindar). In legal terms, it will now become a holding company instead of the financial advisory firm it is today.

The capital increase will be used to increase ownership of portfolio businesses to a majority. As this is via a share swap, Citadel hopes it will ultimately give existing co-investors and limited partners more liquid positions, although swapped shares will be subject to an initial lock-up period.

The background is the aftermath of the 2011 uprising and toppling of president Hosni Mubarak: Citadel has been unable to complete expected exits, while its key holding in the cement industry, ASEC, has further seen lower profitability because of the lethargic economy and administrative paralysis.

After net losses in 2011 and 2012, a holding-company model will give Citadel the freedom to take longer-term views on investments: even permitting it to hold companies indefinitely. It will facilitate consolidated results, says Khazindar, which will make it easier for investors to understand and value the firm.

"It’s difficult for investors on the stock market to value a company with minority stakes in 19 businesses and one majority stake [in ASEC Cement]," he says.

Consolidated industry results will make for a clearer picture of the company’s prospects, says Khazindar, as Citadel reduces the number of its invested companies and narrows its focus to five sectors: energy, transportation, agrifood, mining and cement.

Khazindar says that in the initial period after the capital increase, Citadel will purchase majority stakes in 15 of its 19 firms previously held under opportunity-specific funds. He says Citadel is then looking to dispose of around half of these companies over the next two to four years.

Citadel will, on the other hand, hold and try to build up companies involved in the energy sector, in activities including storage, distribution, refining and waste, in addition to an integrated food firm, a cereals company, ASEC, and mining for minerals used in cement among other uses.

Khazindar summarizes these targets as Africa infrastructure and resources: perhaps unglamourous areas, but ones he sees servicing demographic and macroeconomic trends in Egypt and in countries with similar developmental profiles across north and east Africa.

Firms such as Nile Logistics and Africa Railways – which operates the line between Kampala, the capital of landlocked Uganda, and the Kenyan seaport of Mombasa – are unique businesses with the potential to become much larger. They "deserve a long-term view", according to Khazindar.

The narrowing of focus is partly recognition of the greater constraints upon managerial resources at Citadel since the Arab Spring and the accompanying complications to the operating environment. Concentration on countries within four hours’ flight time of Cairo again reflects this concern.

Among the companies no longer falling in Citadel’s industry focus (and so for sale) are firms in glass and metal manufacturing; and Finance Unlimited, which includes microcredit lender Tanmeyah, Cairo-based investment bank Pharos, and Sudanese Egyptian Bank, a trade-focused commercial bank.

Although Khazindar says the Egyptian business community is more upbeat since the coup, he acknowledges that sales of non-core businesses will not be easy amid continued political uncertainty and overdue structural reform: "We’re under no illusion that [the sales] will take time. This is a long-term plan."