Chairman’s Message

Heading into the year, we had great expectations of 2011: Final close on Egyptian Refining Company (ERC), which is building a US$ 3.7 billion greenfield refinery in the Greater Cairo Area; second and final closes on the MENA and Africa Joint Investment Funds (JIFs); the IPO of TAQA Arabia (our energy distribution platform) and possibly one other investment; a full year of operations from seven newly operational greenfields — all of this was in the offing. Much of that changed when a core group of young Egyptian activists surprised even themselves by bringing about the downfall of an aging and stagnant 30-year-old political and security regime in the 18 days spanning 25 January through 11 February.

Now, more than four months into this post-Revolutionary period, our outlook for the year is rather different. We are heartened by a clear show of political support for ERC from Egypt’s Prime Minister and key members of his cabinet. We are moreover pleased to report that US$ 2.6 billion in debt financing guaranteed by leading development finance institutions and export credit agencies remains in place. That said, equity closure will be delayed, while the IPOs we had hoped to bring to market this year will await a recovery of equity markets. We continue to target a US$ 500 million final close on our JIFs, but anticipate a delay until 2012.

Macro Outlook
Going forward, we see the risk of turbulence, low growth and challenges for corporations of all descriptions in 2011-12 — and, toward the end of that timeframe, substantial opportunities, too. While the recent constitutional referendum was an important step in Egypt’s transition to democracy, the result has also underscored the need for intellectuals and members of the business community to advance a viable policy agenda to address the challenges the country will face in the coming years. Many of these challenges are not new, but we do have an opportunity to now address them more rapidly than at any time in the past. They include:

Policymakers will face fiscal pressure from a widening budget deficit. High global commodities prices (and hence higher subsidies), the need for stimulus spending, as well as higher salaries, will translate into a rising budget deficit in the current and coming state fiscal years. Lower tax revenues will also widen the deficit, while commodity subsidies alone will cost the state purse at least EGP 80 billion in 2011.
The Egyptian pound and national foreign currency reserves will remain under pressure through year’s end — particularly as foreign currency receipts from tourism and remittances ease and FDI dips — benefitting most of our platforms (particularly producers of commodities and exporters).
While the move may be delayed in the short term, restructuring of commodity subsidies will become an imperative in the medium term as the budget deficit widens under pressure from rising prices and will likely occur at a more rapid pace than previously expected.
Amid slower growth (and possibly an economic contraction) this year, we will see reduced spending by corporations, particularly in the vital construction sector.
Egypt will face rising unemployment as a result of the economic slowdown and the return of at least 1 million citizens who had been employed in Libya and, to a lesser extent, the GCC.
Labor action will remain a hallmark of our landscape into the new year, putting pressure on salary budgets, in respect of which we note that the average monthly wage paid by Citadel Capital’s platform and portfolio companies is EGP 3,280, already above the EGP 1,200 labor activists are asking the Government of Egypt to impose as a monthly minimum wage. Indeed, all of Citadel Capital’s platform and portfolio companies had adopted EGP 1,200 as their minimum wage by 1 January 2011. Citadel Capital employs more than 45,000 employees at its platform and portfolio companies.

Moreover, the private sector will face reputational challenges in the coming period due to the inappropriately close ties some corporations had to both the former regime and to the family of the now-former president. In this context, I note once more that neither the former president nor any member of his family is an investor in Citadel Capital, nor do we manage funds on their behalves. We have not purchased land from the Government of Egypt, nor have we purchased any of our platform or portfolio companies from the state. Moreover, all of Citadel Capital’s business dealings with the Government of Egypt have been at market prices through platform and portfolio companies that either buy or sell goods or services.

Furthermore, Citadel Capital has always maintained a staunchly apolitical stance. No member of the Firm or its senior management was a member of the National Democratic Party (NDP, the former ruling party), nor has the Firm ever donated funds to the NDP.

In this context, we again note that Citadel Capital did not acquire Helwan Portland Cement Company (HPCC) as part of the state-run privatization process, but rather from private-sector investors. HPCC was privatized and sold to Arab Swiss Engineering Company in 2001. Citadel Capital acquired the 50% stake in Arab Swiss Engineering held by the heirs of Omar Gemei in 2004 and subsequently purchased the balance of the company’s equity from national and international cement companies. The Firm spun-off HPCC and exited the investment in 2005 via sale to Suez Cement, the local arm of Italcementi.

Crisis Response
Since the earliest days of the Egyptian Revolution, the senior management of Citadel Capital has met daily to guide the Firm’s response to the crisis. A detailed report on the actions we have taken — from cost control and cash preservation measures at the Firm level to a hands-on approach to guidance of our platform and portfolio companies, from communication with our co-investors, LPs and bankers to the postponement of new transactions — appears in the Management Discussion and Analysis section of our Annual Report for 2010, which is available for download in the Investor Relations section of this website.

Citadel Capital was among the first major Egyptian corporations to hold an investor conference call during the crisis to keep our investors, limited partners and the analysts who cover our shares up-to-date with developments on the ground and our response. Moreover, we have continued to engage in dialogue with investors, limited partners, lenders, and government officials that leaves us optimistic that we will enjoy the support we need in the coming period.

2010 Results
In the wake of the Egyptian Revolution and ongoing regional turmoil, it is tempting to dismiss our 2010 results as comparatively unimportant. This would be a mistake: As we face the challenges of the coming 12-18 months, Citadel Capital will draw not just on a healthy balance sheet whose liquidity will be protected by cost-saving measures, but also on the narrowing of execution risk we delivered in 2010 as seven greenfields came into operation, key turnarounds were completed, and the management team at the platform / portfolio level fine-tuned. These achievements will together provide a substantial shock absorber as the economic fallout from the Revolution is felt.

The same inherent conservatism that saw us focus last year on building and nurturing rather than on new acquisitions carried over into our decision at year’s end to write-down our investments in NOPC / Rally and NPC (the latter as a result of its equity stake in NOPC / Rally Energy) even as these continue as operational companies that are actively seeking technical solutions to bring their reserves into production.

Going forward, we will draw on long-standing relationships not just with core regional co-investors, but with the sophisticated international institutional investors and national and global bankers who have given us their support since the earliest days of the Great Recession. Near-term fundraising momentum will surely taper off in an environment that will see players across our industry challenged, but these key partnerships will allow us to rapidly react to any economic upswing and to the substantial opportunities for distressed investing that may appear starting next year.

In sum, we believe 2011 will very much resemble 2009: A year marked by a lack of exits during which we consolidate our base and grow our investments ahead of what we hope will be not just profitable exits in the medium term, but also a re-stocking of our investment pipeline with new opportunities.

Ahmed Heikal,
Chairman and Founder