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Citadel Says Investors Wary of Africa Should Buy Bonds

Ahmed Heikal, chairman and founder of Citadel Capital Corp.
Ahmed Heikal, chairman and founder of Citadel Capital Corp., shows off a model of a river barge used by the firm’s transport unit in Cairo on Oct. 7, 2010. Photographer: Shawn Baldwin/Bloomberg Markets via Bloomberg

As he peers out his Cairo office window at the shimmering Nile River below, Ahmed Heikal offers a visitor his vision of an Egyptian-led African transport revolution.

Heikal, chairman and founder of Citadel Capital SAE, an Egyptian private-equity firm, wants to link his country by a river and rail system from the Mediterranean port of Damietta to Mombasa, the Kenyan city about 4,000 kilometers (2,485 miles) away that lies on the coast of the Indian Ocean. The $650 million effort, designed to help Egypt and other African countries move goods throughout the continent and beyond, began two years ago with a deal to transport 750,000 tons of coal and coke along the Nile, Bloomberg Markets reports in its December issue.

“Transportation in Africa is the single biggest impediment that exists for the development of the continent,” says Heikal, 48. “Our vision for transport is to try and link through a number of deals, each standing on its own two feet, linking Damietta to Mombasa.”

Heikal and Hisham El-Khazindar, former investment bankers at EFG-Hermes Holding SAE, started Citadel with $400,000 six years ago. Today, the company controls investments worth $8.3 billion in 15 different industries, such as oil refining, railways and agriculture.

New Executive Class

Citadel Capital’s founders are part of a new class of executives who are raising funds for projects designed to help Egypt’s economy grow at a rate high enough to create more jobs. Those firms include Beltone Financial Holding, a Cairo-based investment bank created in 2002 that now has 20.2 billion Egyptian pounds ($3.5 billion) under management, and Palm Hills Developments SAE, a publicly traded property company established in 2005 that plans to build low-cost homes in Egypt and sub-Saharan Africa. Palm Hills held a land portfolio valued at 37.4 billion Egyptian pounds as of October 2009.

Many of the firms behind privately backed Egyptian projects came into existence following a 2004 economic reform program led by Prime Minister Ahmed Nazif. The government cut corporate and personal income taxes in half, to 20 percent, and accelerated the sell-off of state-owned companies such as Telecom Egypt. The effort also helped trigger the growth of publicly traded companies such as Orascom Telecom Holding SAE while expanding Egypt’s influence throughout sub-Saharan Africa. From 2004 to 2009, the Egyptian government reaped 39.5 billion Egyptian pounds from the sale of state assets, according to Egypt’s Investment Ministry.

Still Growing

Egypt’s liberalized economy, along with the financial industry’s minimal holdings of subprime loans, helped the country of 80 million people avoid the worst effects of the global recession.

The country’s economy grew 5.1 percent in the fiscal year ended on June 30, compared with 4.7 percent in 2009. The government forecasts that gross domestic product will expand by about 6 percent in fiscal 2011 and says 7 percent growth is needed to provide jobs for the 750,000 people who join the workforce annually.

“I am an avid believer in privatization,” says Aladdin Saba, chief executive officer of Beltone Financial and a member of the ruling National Democratic Party’s economic policies committee. “The participation of the private sector in developing infrastructure is key.”

Political Transition

Yet Egypt’s growth story is shadowed by questions about political stability. President Hosni Mubarak who became Egypt’s leader upon the assassination of Anwar Sadat in 1981, hasn’t announced whether he would run for a sixth term in 2011 or whether his son Gamal, regarded by many analysts as Mubarak’s successor, would replace him on the ballot.

Mubarak, 82, whose health concerns include a gall bladder ailment that required surgery in Germany in March, would be in office past his 89th birthday if he serves another term. Hospital officials said at the time that the procedure was a success.

“The debate is there, but it’s not keeping investors away from Egypt, says John Sfakianakis, chief economist at Banque Saudi Fransi, based in Riyadh, Saudi Arabia. “The succession issue has been debated for such a long time, it’s in some ways priced in.”

To spur a greater expansion, Egypt needs to reduce its $17 billion fiscal deficit, combat inflation that rises above 10 percent annually and attract more non-oil foreign investment, Sfakianakis says. “They need to create finance, and they need to keep the environment more open and business-friendly to medium-size and smaller foreign investors,” he says.

Stimulus Program

Following government stimulus programs that have totaled $4.5 billion since 2008, the country’s deficit now stands at 8 percent of GDP. The International Monetary Fund expects Egyptian consumer prices to rise 11.7 percent this year and 10 percent in 2011.

So far, Western investors are holding back. Foreign direct investment was $6.7 billion in the 12 months ended on June 30, less than the government’s target of $10 billion and down from a peak of $13 billion in the fiscal year ended on June 30, 2008. Most of the funds were poured into energy and telecommunications, industries that traditionally attract the bulk of foreign investment.

Funding from the Arab world has also grown scarce. Private-equity investments from the Middle East and North Africa declined to $561 million last year from $2.72 billion in 2008, hit by the global credit crisis, according to Manama, Bahrain-based Gulf Venture Capital Association.

Asset Sales

The bankers behind Citadel Capital benefited from the drive to sell state assets. The firm’s first major investment was the December 2004 purchase of 49.8 percent of ASEC Holding, which included a cement company it had bought from the state, for $52 million, El-Khazindar says.

In 2005, Citadel Capital sold that ASEC asset, Helwan Cement, for $560 million. Citadel was able to make a large profit because, as a result of the country’s moves to boost the economy, construction and real estate boomed. “ASEC was the first milestone,” says El-Khazindar, who earned an MBA from Harvard Business School.

That year, the firm was part of a group that bought Egyptian Fertilizers Co. from the government for $739 million and sold it to United Arab Emirates-based private-equity firm Abraaj Capital Ltd. in 2007 for $1.41 billion. Citadel has invested in six energy companies to take advantage of the country’s location as a bridge between Africa and the Middle East.

Regional Expansion

In 2006, Citadel Capital created Taqa Arabia, an energy company based in Cairo. Taqa Arabia, which distributes gas and electricity, has invested 1 billion Egyptian pounds by acquiring and incorporating 21 companies, expanding to the United Arab Emirates, Qatar, Libya, Jordan, Sudan and Syria. Citadel plans an initial public offering for Taqa Arabia next year.

“Historically, could you have imagined investing in the power sector in Egypt?” Heikal says. “Egypt will have to restructure its energy regime. There will be a lot of investments that will take place in the energy sector.”

Citadel Capital is still struggling to recover from its decision to list shares in the middle of a credit crisis. El-Khazindar says the move was prompted by the demands of investors who needed cash.

Just as Citadel stock began trading in December 2009, Dubai’s debt crisis exploded. The company’s shares are down 0.3 percent for the year, compared with a 9 percent rise in the benchmark EGX30 Index. The firm’s shares have lost 39 percent of their value since they began trading.

River Barges

Citadel Capital also faces a lawsuit from Ken Griffin’s Chicago-based hedge fund Citadel LLC over its name and castle logo. The U.S. firm filed a trademark infringement suit in Washington in May; spokeswomen for both companies declined to comment on the matter.

Egypt Kuwait Holding Co., the only other publicly traded private-equity firm on the Egyptian stock exchange, is controlled by Kuwait’s Kharafi Group. Egypt Kuwait’s shares are down 0.6 percent for the year as of Nov. 4.

As part of Citadel’s transport plan, its Nile Cargo unit took delivery in August of two custom-designed river barges, the first of a fleet of 135 vessels designed to carry goods along the Nile.

In November, Citadel finished construction of the Tanash river port in north Cairo -- a key staging area for the transport hub -- and has a five-year agreement to transport 2 million tons of wheat annually along the river for the state-owned General Silos and Storage Co.

Sudan Investment

In Sudan, Egypt’s neighbor to the south, Citadel signed a leasing agreement with the Sudanese railway authority to offer cargo transport services. The firm has also leased more than 500,000 feddan (519,000 acres) of land in Sudan to grow grain sorghum, corn and other commodities.

Heikal, who earned a doctorate in industrial engineering from Stanford University in California, says he is prepared for the challenge of operating in Sudan. The African nation has suffered from civil conflicts that have killed about 2 million people and is considered by the U.S. State Department to be too dangerous for Americans to visit because of terrorist threats.

“Certainly investing in these geographies is not for the fainthearted,” Heikal says. “The returns make it compelling to invest. If you want to wait until there is no political risk, then go invest in Switzerland and get 1.4 percent on your 10-year government bond,” he says.

‘Lunatic Express’

The cross-border transport project includes a $250 million investment in Citadel’s Rift Valley Railways to modernize a 2,000-kilometer railway connecting Mombasa to neighboring Uganda that was dubbed the Lunatic Express during its construction in 1896 when many of its builders succumbed to tropical diseases and lion attacks. Citadel has a 25-year license to operate the line.

“It makes sense to go to sub-Saharan Africa,” says Hatem Alaa, a Cairo-based analyst at Egyptian investment bank HC Securities & Investment Co. “African countries have a long way to go, but they will develop and they have growth potential.”

Firms such as Citadel may have a tougher time persuading more wary Western investors that those African adventures will pay off.

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