A Spring in their step

Citadel Capital’s team has had first-hand experience of the Arab Spring from its headquarters in Cairo. Asked what it was like for those caught up in the revolution in Egypt, Citadel managing director and co-founder Hisham El-Khazindar, described it as “an incredibly exciting time”. He also acknowledged that while the country faced some specific problems, they were all “very solvable”. 

As a firm, Citadel has been busily addressing its own problems. As well as cutting costs and its headcount, El-Khazindar explained that the group’s rights issue this month was the first of several steps that would add $200 million to the group’s war chest by year’s end.

“The fact that the rights issue was fully subscribed is a sign of confidence from both regional and international investors in our business, against a background of a very reluctant market generally. We will be in a strong position to support development plans for our investments and to give our existing business platforms the flexibility to maneuver through the economic fallout that is expected for 2012-13, and to pursue new opportunities on multiple fronts,” he said.

Hisham El-Khazindar

It’s been a difficult and tumultuous period for the group. Earlier this year, with the Arab Spring in full swing and revolutionary fervor gripping Egypt after the country’s president had been ousted, El-Khazindar’s co-founder Ahmed Heikal was given a travel ban (ironically enough, while travelling abroad in Saudi Arabia) while state prosecutors probed allegations of corruption and profiteering in connection with the deposed president Mubarak. Citadel was also accused of profiteering during the privatisation of state-assets. Both charges were dropped shortly afterwards – not least because it hadn’t actually been formed at the time of the alleged profiteering – but the group’s share price took a battering.

The charges were especially galling for the group, whose management team has always been careful to avoid mixing business with politics.

Against that backdrop, Middle Eastern peer Abraaj Capital approached Citadel in the summer with a view to making an offer for the Egyptian group. El-Khazindar said the firm’s management had owed it to shareholders to hold talks with Abraaj.

But the talks ended after the parties failed to reach agreement on terms that would “maximise value for all Citadel Capital shareholders equally, and adequately protect the interests of the firm’s stakeholders and co-investors”. El-Khazindar said Citadel had drawn a line under the episode months ago.

So where now for the group?

“We have taken several measures post-revolution: we have delayed larger exits for 12-18 months, accelerated our plans to strengthen our balance sheet, continued to closely manage costs at both the firm and the platform levels and stopped new acquisitions and greenfield investments in 2011,”  El-Khazindar said.

He justified the halting of further investments with reference to the group’s structure: “Citadel has a hybrid business and revenue generation model: we are both a significant principal investor in our platform companies and an asset manager of third-party money from leading MENA and global limited partners. We have to be willing to hold on to investments and act like a strategic long-term investor where appropriate. Circumstances over the last few years have forced us to be even more of a hands-on investor than we were already, but we’re comfortable with that and well-equipped to follow that path,” he added.

On the realisation side, the political and economic turmoil in the MENA region has made it difficult, if not impossible, to successfully complete exits. Citadel cited the lack of realisations as the main reason behind its second quarter loss of $4.2 million in its results earlier this week.

With a newly replenished balance sheet however, Citadel will in due course look at new deals. And as the revolution in the Arab world continues, opportunities have begun to present themselves, El-Khazindar said. “We continue to monitor closely developments in Libya which present great opportunities – in some respects, Libya is where the GCC countries were 20 or 30 years ago: it has lots of resources but is in need of just about everything.”

Asked about the mid to long-term prognosis for the region, El-Khazindar erred towards the bullish end of the spectrum. “The majority of our investments are firmly on the right-side of macro-economic trends. We have four main investment themes: local resources, population growth, expected currency devaluation and the inevitable liberalisation and deregulation of energy prices as well as the removal of government subsides. The economic

Ahmed Heikal

fallout following the revolution in Egypt has accelerated these trends, and while it continues to have an impact on the pace of platform company development, we are cautiously optimistic.”

Heikal echoed those sentiments. “Our platforms are heavily weighted toward exporters, which will benefit from any further devaluation, as will our commodity plays in sectors including agriculture, mining and oil and gas. We have important investments outside Egypt that continue to deliver results, and energy deregulation in Egypt and beyond has always been one of our core investment theses. Time is accordingly on our side: we are not fighting the currents, but sailing with them.”