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 productsetc. 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.

Horizontal Expansion:
In this model, EFC has to expand its second production line by a total of 200K tons
of Urea per annum, while increasing its excess ammonia production by around 16K
tons per annum. An investment with around $70 million was taken into account, and
financed totally through debt. This model reflected a better fair value for the
company of around $840 million, which increased the whole value for EFC, showing
better IRR values along the investment window. Applying this strategy will enable
Citadel to have around 37% IRR if they sold during the 2 nd year, while offered
another good opportunity for a 26% IRR during the 3 rd year for a total value of $1.46
billion, which could be more feasible.