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Private Accord
The recent deal between private equity investor Actis and Egypts Momen Group offers a promising model for midsized Egyptian businesses looking to expand

In a deal worth $48.5 million (LE 257 million), local food and retail player Momen Group has sold 28% of its business to United Kingdom-based private equity investor Actis. Reached following two years of negotiations, the deal will see Momen secure a much needed capital injection to fund aggressive expansion plans across Egypt and the Middle East and North Africa (MENA) region.

For Actis, the purchase represents the next step in its growing presence in the Egyptian market and a continuation of the companys successful strategy of investing in medium-sized sector leaders across emerging markets. The deal itself may offer a model for mid-sized or family-run Egyptian businesses looking for extra capital to grow and compete in Egypts increasingly globalized market. As Momen concluded in bringing Actis on board, the Actis investment model provides the benefits of capital and expertise for growing domestic companies, without relinquishing control over direction of the company.
Emerging Market Investor

It was not long ago that emerging markets were seen as too risky for the average investor, remaining the province of currency speculators and resources companies alone. Now, with growing consumer wealth and the deregulation of foreign investment, investors are being enticed away from the slim pickings of wealthy economies to the diverse opportunities available in other parts of the world. Unlike the recent influx of investors though, Actis has been focused on what used to be called the third world, but is now termed emerging markets. Actis is a leading private equity investor in emerging markets, says Sherif Elkholy, investment principal for Actis Egypt. We focus exclusively on emerging markets. Weve been investing in emerging markets for about 60 years. Our focus geographies are Africa, South Asia, South East Asia, China and Latin America. We have just under $7 billion [LE 37 billion] under management internationally, out of which about $1.5 billion [LE 7.95 billion] is invested in Africa, he says, summing up the scope of Actis global activities. Private equity investment refers to the purchase of stocks in private companies, rather than those of publicly listed companies through a stock exchange such as the Egyptian Stock Exchange. The process usually involves a private equity investor purchasing a certain interest in their target and then initiating a period of restructuring before exiting the investment using a merger, sale, initial public offering or recapitalization such as a stock for bond swap. The strategy utilized by many private equity investors involves taking full control of their investment targets, replacing management and aggressively restructuring the acquisition to maximize value before selling out. The Actis investment model on the other hand, focuses on selecting market leaders with well-performing management and adding value to the company by bringing into play the expertise of Actis years of experience in emerging markets and wide network of industry specialists. In terms of selecting our investments, we select leaders in their fields, explains Elkholy. We invest in existing, profitable, established businesses, that are good or very good and we help them become excellent at the international level. This strategy focuses the company on established industry players where the acquisition value ranges from $50-150 million (LE 265-795 million), although Actis does pursue larger deals through syndication with other firms or co-

investors. Acquisitions across Africa have included privatizations, management buyouts, family-owned companies and large projects. If you look at our track record of investments in North Africa, it is self explanatory, says Elkholy. Weve invested in some of the leading businesses and weve added value to them and made market leaders, better market leaders, or weve made businesses that were good [] better at what they do. Actis operates out of four centers in Africa: Cairo, Lagos, Johannesburg and Nairobi, with support from the London head office. The companys investment activities on the continent are covered by three generations of funds, an indication of Actiss long presence here. We have a vintage fund, Fund One, [] which is currently broadly in realization mode. We have Fund Twos, which are regional funds, out of which there is a specific fund for Africa, and we are in the process of finalizing our Fund Three, which is going to be different, but we are waiting to finalize that before we can disclose details on it. Its going to be substantial and its going to be a global emerging markets fund in addition to some regional side pools as well, outlines Elkholy. Actis has a diverse range of investments across the African continent including shopping malls, financial services firms, mineral exploration and mining, agribusiness, logistics, telecoms and energy sector activities. These investments include regional operations such as communications company Celtel, sub-Saharan energy supplier Empower and the Trans African Concessions road project linking Mozambique and South Africa. Business has been picking up in the MENA region as well. So far in this region weve done six transactions: four in Egypt, one in Algeria and one in Tunisia, says Elkholy. We invested in Tunisia in an upstream oil and gas business Candax Energy and we are still an investor in Orascom Telecoms Algerian subsidiary Djezzy, which is also a very good investment.
Step-by-Step in Egypt

Looking out the window of Actiss Nile-side Zamalek office, Elkholy turns to the companys Egyptian operations. We opened shop in Cairo at the end of 2001, beginning of 2002, he says. Cairo is the regional hub for all of North Africa. Out of here we focus on Egypt, but we also help our colleagues in London to look after the rest of North Africa Tunisia, Algeria and Morocco. Somewhat unusually Actis chose to enter the Egyptian market when it was in recession, but as Elkholy points out; this provided a significant advantage to the company. Egypt was in recession at the time we came, but it was clear that it had all the right characteristics that it was going to pull out of the recession. [] We enjoyed the first-mover; we were here before it took off. And our hypothesis was correct the economy came out of the recession. Actiss first investment in Egypt was also the nations first ever management buyout where the companys management purchases the company they work for undertaken in Egypt. Actis, along with El-Rashidi El-Mizan Confectionary Companys management, purchased the halawa and tehina producer from multinational FMCG (Fast Moving Consumer Good) giant Unilever. After nearly five years upgrading El-Rashidis operations, which saw sales more than double from 2002 to 2006, the business was sold to Cairo-based private equity firm Citadel Capital in December 2007. This was a 120-year-old brand that was family owned and run, which was then bought by Best Foods. Best Foods was bought by Unilever; Unilever sold the business to us, says Elkholy. It was very much a family-owned business. And although we were the controlling shareholder in it, we empowered the management, which was largely family members, to develop this sort of simple business, to make it one of the best run and operated business in the country. The second investment in Egypt the purchase of the 683 megawatt natural gas-fired Sidi Kerir power plant was managed through Actis subsidiary Globeleq, an investor in emerging market energy sectors. The initial 61% percent purchase made in 2004, was expanded to a 100% ownership in 2005, which Actis then sold at the end of 2007. In 1H2008 Sidi Kerir showed that it was very profitable pulling in LE 595.1 million net profit, up from LE 580.8 million in 1H2007. We also invested last year in Sinai Holding, which is one of the leading producers of marble and granite, says Elkholy, listing off Actiss third Egyptian investment.

Actis acquired a 70% stake in integrated marble producer and exporter Sinai Holding for Marble and Investments in June 2007, to take advantage of what Actis saw as growing demand for high quality Egyptian marble. The investment capital was earmarked for Sinai Holdings expansion plans, which included five new quarries and a marble processing plant to triple finished product output. Marble and granite is a highly fragmented sector and its not properly institutionalized at all, says Elkholy, outlining the thinking behind the investment in what is something of a frontier sector of the Egyptian economy. When we considered this investment, we thought that this was a sector that is going to consolidate. It has a clear competitive advantage: It has top quality material, it has a very good cost advantage and it has proximity to all the big export sectors, he continues. We identified Sinai as a clear winner in that sector, and we identified Engineer Medhat Moustafa as an authority in this industry and a very backable chairman. Out of the four Actis investments in Egypt, the investment in Sinai Holding remains the biggest unknown in terms of its success, something that Elkholy does not elaborate, although he remains confident that the money was well placed. The plans are going on schedule, we are very happy with the relationship so far, we are very happy with the progress to date. These things obviously take time. I think that our investment thesis was well placed. And I think that over the holding period, this business is going to be one of our big stars, he says. The Momen deal, announced July 30, is Actiss fourth acquisition since the company set up shop in Cairo.
The Momen Deal

Family-owned Momen Group, founded in 1988, is best known for its Momen chain of fast-food outlets. Yet while the business initially started out as a fast-food player alone, its activities have expanded to include the restaurant chains Pizza King and Planet Africa, the Three Chefs frozen and ready-made foods label and significant meat production facilities. People may think that Momen is just about the Momen restaurants, but this isnt the case; Momen is now a significant integrated food business, says Elkholy. It has the food processing side it has a very good food processing facility in Obour City. It produces pre-cooked and frozen meals that are sold in supermarkets under its own proprietary label, Three Chefs, which is doing very well. It also has a franchising arm, it has an import and distribution arm and there are going to be other lines of business in the business plan, which are also very promising. It was this combination of a recognized brand, scale of activities and expansion plans that attracted Actis to the company. We decided to invest in Momen group because we think that it is a very well-positioned business. Theyve got a fantastic brand its effectively a household name, says Elkholy, who goes on to describe the investment experience from the Actis side. The men behind the household name are Mohammed Momen, founder and executive chairman of Momen Group, and his brother Hatem, the groups vice president. I met with Mohammed Momen two years ago. After a lot of trying I got through to meet him for an introductory meeting, he begins. When I spoke to Mohammed for the first time, the concept of private equity was completely new to him. It was a closed family-oriented business and the thought of having an outsider coming into the shareholder base was taboo. It took quite a lot of work and explanation of what Actis is about and why its in his companys interest to have Actis alongside them to get a second meeting and to explain more, to show him what weve done in this sector over the world before and what weve added to these businesses. It was a process of building trust. Sitting above the bustling facility at Obour City, Mohammed Momen exudes the air of a man not just in control of his business, but clearly passionate about its success. He leans forward as he begins describing the other side of the investment story. The negotiations started in mid-2006. At that time we had some projects in our pipeline, like we needed to acquire a chicken slaughterhouse in Ismailia. Actis knocked on our door during the negotiation with the owner of the slaughterhouse. It clicked in our minds; the idea of making business with a private equity firm, he says. We went through our business plans and our financial figures, vision and so on. But for some reason our negotiation with

the [chicken] project stopped, so we had to slow down the process [with Actis] because we didnt have the appetite to get money without having projects to spend it on. Negotiations between Actis and Momen revived mid-2007 as Momen once again turned to its expansion plans, this time with the benefit that Actis had seen a year of Momens performance. The beauty is, because they had our figures mid2006 and they knew our targets, after they came back a year later and after they checked our figures, it showed them that we exceeded our targets by 25-30%, says Momen. From that point on, the process sped up. Within a month a Memorandum of Understanding was agreed upon and the companies got into serious discussion on a five-year business plan, investment requirements and the range of potential projects. So we went through this process to identify what projects we need to start, in which regions and which industries and then we calculated how much money we needed based on the feasibility studies for each project, says Momen. Without a capital injection it was impossible, he continues, referring to Momens ambitious expansion plans. Actually this $48.5 million is just half of the capital needed.
Launch Pad Egypt

Listening to Momen outline his companys aggressive expansion plans for Egypt and the MENA region, it is easy to see that the cash injection will not stretch far. On the back of rising consumer income in Egypt the company is pushing ahead with its current restaurant chains and is about to make a foray into a domestic coffee shop chain, alongside launching a retail brand of Momen sauces within the next three months. We are in the process of acquiring a coffee shop concept established in Egypt with very few outlets, but it has the edge. [] Within Egypt we believe we can create the concept and then start to franchise the concept, same as we did with Momen, says Momen. We are repositioning the Pizza King brand, because the old investor was milking the cow, he continues. The customers are very well defined, by having the buy-one-get-one-free. Well keep this concept as is, because were playing alone in a huge market. The rest of the pizza chains like Pizza Hut, Papa Johns are fighting in a very small segment. Pizza King is for lower B and C. Alongside getting a facelift, more Pizza King restaurants will be rolled out across the country, as well as another Planet Africa branch in Hurghada within the next four months. Plans are not limited to Egypt though. With retail franchises already operating in Dubai, Sudan, Libya and just last month Bahrain, Momen is looking at strong growth abroad. At the moment a Planet Africa branch is under construction in Dubais Jumeirah beach road and Momen restaurants are spreading across the region. We have restaurants in the pipeline in Saudi Arabia as well as the Emirates, plus we have serious negotiations with other potential franchisees in Kuwait and Qatar, says Momen. Momen works through franchising, where the company has identified its competitive edge filling a gap between the well-known American restaurant chains and local tastes. In every country where we are doing business, we are signing a contract with an exclusive franchisee and we agree to a five-year business plan, says Momen, outlining the companys expansion strategy. In this five-year business plan he has to open a certain number of restaurants based on the market capacity and market research and other technical issues, he says. The largest barrier Momen is facing is that many franchisees, despite Momens obvious success, believe American is better. The issue is most of the franchisees like to approach a multinational and American concept rather than other national concepts. But well prove that the local concept like Momen will succeed and will do good business, he says. Already operating chicken and beef processing facilities, Momen is also expanding its meat production capacity. When

it comes to the further processing industry we have an aggressive plan, says Momen. We tripled our capacity in three years. Now we have the second biggest market share in the food processing sector in Egypt. The company is building a 10,500 bird-per-hour chicken slaughterhouse that will come online in 12 months as the company struggles to meet annual sales growth between 30-35%. At the same time Momen is expanding its bakery, looking into establishing a tomato paste, fruit pulp or frozen vegetable facility on 120 feddans on the Cairo-Alexandria Desert Road, and has opened negotiations with some multinational companies to establish a joint venture for logistics and supply chain, lists off Momen. And thats just Egypt. The company is also about to begin producing its Three Chefs brand in Saudi Arabia after purchasing a 45,000 square meter factory in the Daman industrial zone. Within eight months well start, inshallah, producing the Three Chefs brand in Saudi Arabia, says Momen, who concludes the lengthy list of expansion plans by saying: 24 hours a day is not enough for me.
The Actis Model

There is no doubt that the capital provided by the deal with Actis will benefit Momen greatly in its expansion plans, but how does the nature of the deal affect the company overall? This is where the Actis investment model differentiates itself from a lot of the competition. We dont really look to takeover daily management or operations of any business we invest in, says Elkholy. To the contrary, we make the call on the people we back from the first day and essentially what we do is empower them to run their businesses with our support and value add. This value add comes in two forms: representation at the board of directors level and expertise introduced through Actiss international network. Our main value add is at the level of the board, says Elkholy. We always have representation on the board of directors. But in terms of taking over ownership, or managing a business A, we are not equipped to do that, and B, we dont have the bandwidth to do that. They were very cooperative and open minded actually, says Momen, reflecting on his side of the negotiations. They trusted in our management style and they trusted our expansion and vision as well. So there was a mutual understanding between both parties. While the negotiation experience was clearly positive for both parties, it was the expertise offered by Actis, combined with retaining control over the direction of the company that attracted Momen to the Actis proposal. I have to tell you that during this negotiation a lot of private equity firms from several countries had the same appetite to invest with us, says Momen. Money is everywhere, theres a surplus of money in the Gulf area. But its not only the money, its how we can get the know-how, how we can get the technical assistance in some areas that we are missing in our Group. This is one of the main strengths in Actis, he says, explaining the decision behind taking on board the private equity investor. I remember last December there was a major acquisition in a big poultry project in Cairo, the Misr-Ismailia Poultry Project, he continues. Its a megaproject. This project was completely out of our scope, but when the government announced that it wanted to sell the project, [Actis] understood the criteria, they were convinced by the concept and they brought one of their poultry experts who did the due diligence and wrote a technical report, and they were very cooperative, he says, adding that Actis is providing the same kind of expert advice to the tomato paste project feasibility study. But going down the private equity road did mean some significant changes to Momens operations, including a total legal restructuring of the Group. We had to redesign or re-establish from a legal point of view, says Momen. Now we have a holding company, this holding company owns all the sister companies, at the same time we had to restructure every individual company we had some partnership companies, we had some shareholder companies so we had to unify the legal structure. [] Of course we had to finalize lots of tax issues and tax implications, but at the end of the day it has benefited the Group, of course.
The Money Business

The private equity sector in Egypt is heating up as a growing number of foreign and local players chase fewer and fewer deals in an increasingly deregulated market. There are now too many private equity firms chasing too few deals, agrees Elkholy. Quality assets are not many you have to look very hard before you find the right one. And if you find it, almost always you find that there are others chasing it. Its highly competitive, so when we are able to find a proprietary transaction, we try and move very fast on sealing a deal. Thats good news for businesses in Egypt, although deregulation is also something of a double-edged sword: financing opportunities expand, but at the same time so does the competition. In this sense the Actis-Momen deal provides a model for how mid-sized businesses can secure capital to expand and compete at an international level, without giving up control of their operations. I think private equity has played a very specific role, at least in Egypt, in helping drive this institutionalization of familyrun businesses and changing mindsets, says Elkholy. In terms of adding value to finance functions and providing corporate finance support finance functions in Egyptian business are weak, with the exception of the big companies of course, he adds. It has also played a big role in helping corporate management teams differentiate clearly between what is a good business idea, and what is a good investment idea and looking at their capital expenditure decisions, capacquisition decisions, he says. They are in the money business at the end of the day, says Momen, neatly summarizing the private equity sector. One of my major strengths is that I know the industry inside out. But on some occasions you need to think about your business from an investment point of view. This is one of the major strengths in having this partnership with Actis. They are in the money business, they have no emotions towards the business, so the decision will be 100% based on the financial point of view. Momen for his part sees a growing role for private equity in Egypt. Three or four years ago if someone came knocking on my door asking to be my partner I would have thrown him out, he says with a smile. After I was approached by Actis, I started to think about the pros and cons from this partnership, this private equity deal, and I started to see the big picture. Every business owner begins to realize if I dont start to expand, if I dont become a part of the big picture, I will disappear. Since the deal was announced, Momen has been contacted by his colleagues in the food and retail sector, asking for his advice on whether private equity investment is appropriate for their business. They see that theres a challenge for them, theres potential growth for their companies and they want to do the same, explains Momen. And his advice for other businesses considering their financing options? Firstly, you have to have a clear vision and strategy. For me, this deal is the most important and strategic decision I have ever taken, plus of course getting married, he says with a laugh. The second thing is that you need to have a very clear objective and business plan a five-year business plan to identify what is your expansion, what is your capex need. Most companies are failing because they dont have an accurate, clear business plan. They start doing business and they discover in the middle of the road that they have a shortage of money. So they ask the private equity firm to invest more. [This means] their share is getting diluted each time. They start to feel demotivated, [trapped] in a vicious cycle where he has 10, 20 or 30% of his company. He missed the opportunity to expand and he starts to be just a shareholder or a partner in the company, then he is replaced by someone running the business. These are very important issues to be considered in any deal, like our deal with Actis. While the appropriate funding model will differ from one business to another, the Momen experience highlights the critical factor for the success of any Egyptian business: planning for a more competitive future.