Citadel Capital

Valuation Methodology:

Originally, we have 2 main targets, the first of which is determining a suitable purchase price at which Citadel Capital should bid on EFC, including also the maximum value that could be tolerated relevant to the forecasted corporate performance after integrating several expansion plans and improvement strategies; and the second one is determining the optimum exit time to maximize the IRR for Citadel Capital from such an investment, along with the target selling price.

DCF was used to calculate a suitable bidding price through which cash flows were estimated and forecasted for different operational scenarios, including basic scenario, horizontal expansion, vertical expansion, new products…etc. After which, all cash flows were discounted at the required given WAAC (14.1%) to reflect the corresponding range of enterprise values depending on the best and worst operational cases. Hence after, our recommendation was to bid with the fair price that reflects the value of the basic profile of the company taking into consideration the 2nd production line which is planned to be up and running by mid-2009.  This would increase the opportunity of Citadel Capital to generate its target IRR (25% or more) by selling during the 2nd or 3rd year (will be shown later).

Free Cash Flows was calculated primarily based on the 3 basic models we have, including the basic plan, horizontal expansion and vertical expansion. Terminal value was calculated after year 5 considering Urea prices will rise due to the increasing prices of gas worldwide along with the decreasing supply, in contract to EFC fixed gas prices due to the long term contractual agreement with the government that hedges EFC gas prices till 2018, which is considered one of the main competitive advantages of EFC across the international market.

Basic Model:

After building the financial model for this approach, we got a fair value of about $732 million as shown below. After which, we calculated an estimated value for the company at each year (starting year 2), to have more insights about the selling price along with a recommended exit time. This resulted in a proposal of selling the company during the 2nd year for $1.25 billion, in order to achieve the target IRR which surpassed the 25%. On the other hand, if the company missed to sell during the 2nd year, the offered fair prices will not meet the required IRR.[pic 1]