Investment Policy News
- More hurdles could await ground-breaking deal
Date: 20-Mar-2007 Sources: (Xinhua Online)
Xugong, a major local construction equipment maker, may not be in The Carlyle Group's bag just yet as the case may have become a testing ground for the government in managing State-owned assets and regulating foreign acquisitions in key sectors.
Shenzhen-listed Xugong Science & Technology issued a statement on Friday saying its controlling shareholder, Xugong Construction Machinery Group, had agreed to sell 45 percent of its stake to Carlyle.
This is the second time in less than two weeks that the US private equity giant revised its terms of buying into the largest Chinese construction machinery company.
Last October, Carlyle reached an agreement with State-owned Xugong to buy 50 percent of its stake for 1.8 billion yuan.
The original deal between the two parties signed in October 2005 required Carlyle to pay 375 million U.S. dollars for 85 percent of Xugong. But following outcry that foreign control of a major construction equipment maker like Xugong might hurt national economic security and that State-owned assets were being sold cheap, Carlyle revised the terms of the deal twice in the past five months.
According to the Friday deal, Carlyle will only have a minority stake in Xugong so it's easier for it to get the approval of the Chinese authorities, which have reservations about foreign investors buying controlling stakes in key State-owned companies.
But despite the concessions, it may not be easy for the Carlyle-Xugong deal to go through in the near term.
Global private equity giants have been seeking out targets to buy. Thus China has attracted big names like Carlyle, Texas Pacific Group, and Kohlberg Kravis Roberts & Co.
The Chinese authorities, with deep concerns over economic security issues and no ready experience in dealing with private companies, which buy into firms and sell them for profits, have been trying to build a legal framework to regulate such acquisitions.
Premier Wen Jiabao said in his report to the National People's Congress that the government should guide foreign acquisitions in a direction fitting the country's strategic needs and impose proper regulations.
At the same time, the Chinese legislative body will review a State-owned assets law that regulates transactions of such assets to ensure that they are not embezzled or sold cheap.
It may thus be natural that China will want to test the waters further with this case to gather more experience for relevant regulations. Considering the long and complicated legislative process and the need to set up a model, the Xugong-Carlyle deal could well face more challenges and scrutiny.
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