85%…50%…45%. Carlyle’s China Trials.

Related entries: Business Issues, Corporate News, General, Investment, News, Risk & Law

China has been a magnet for foreign direct investment (FDI) in recent years, pulling in US$60-70 billion annually. However, as note in recent posts (here and here), the investment environment has become somewhat more complex as China’s economy has developed, and as attitudes to the role of foreign investment have changed.

The most high-profile problem encountered by a foreign firm in this developing environment has been Carlyle’s attempted purchase of Xugong, a big state-owned construction machinery company. And the FT reports that the deal is still not done…after 18 months of effort:

“Carlyle agreed in October 2005 to pay $375m for an 85 per cent stake in Xugong Construction Machinery, a listed company whose parent is controlled by the local government of Xuzhou city, after a year-long public auction. But the deal got caught up in a backlash over foreign investment and the merits of private equity investment. Carlyle was forced to cut its planned investment to 50 per cent. The revised deal was approved by the government body that monitors state-owned assets.

However, it was rejected by superior regulators on the grounds that the sector is of “strategic” importance. Caijing, an influential Chinese business magazine, said this month the commerce ministry had rejected the revised bid.

According to people familiar with the situation, Carlyle is now discussing taking a 45 per cent stake in Xugong, and could re-submit the deal for approval over the next few weeks.”

Despite Carlyle’s problems, not all foreign investment is likely to be given such a grilling (by the likes of the National Development Reform Commission or “NDRC”). The FT reports that Volvo recently completed a deal (and got the regulatory approval) to buy 70% of Lingong Construction Machinery. Last year Rotary Vortex (a Goldman company) also got approval to buy Shineway (a major meat processing business). The key seems to be whether the target is seen to be a strategic asset in a sensitive sector.

Potential foreign investors would be well advised to include policy risk in pre-acquisition due diligence, and to manage any approaches with sensitivity.

See news source:

    Carlyle rethinks terms of Xugong deal
    By Sundeep Tucker in Hong Kong and Geoff Dyer in Shanghai
    FT.com (Subscription)

Leave a Reply

You must be logged in to post a comment.