Thursday July 3, 04:50 PM
Carlyle's Xugong contract lapses [at Financial Times]
By Sundeep Tucker and Geoff Dyer in Beijing
The contract underpinning the controversial planned investment by Carlyle Group in a Chinese machinery maker has lapsed, raising the prospect that the three-year-old deal will have to be revised again to secure regulatory approval. The US private
equity firm agreed in October 2005 to invest $375m for an 85 per cent stake in Xugong Group Construction Machinery, and the failure to be granted approval has turned it into China's longest-running cross-border corporate saga.The deal fell victim to a nationalist backlash over foreign investment in industries deemed to be strategic, and mainland regulators have declined to approve the tie-up despite Carlyle scaling back its proposed stake to under 50 per cent. People familiar with the deal said the contract between Carlyle and Xugong had lapsed in recent weeks, though neither side was yet willing to publicly walk away from the deal. Carlyle and Xugong declined to comment. One person said: "The deal has not been officially terminated and, of course, a fresh contract could be signed. But it will take a miracle for it to proceed. " The original deal, the culmination of a 12-month public auction, was supported by the provincial government of Jiangsu, but has failed to secure the backing of relevant ministries in Beijing. In recent months Beijing has stepped up its support for China's fledgling domestic private equity industry, and some deal-makers believe regulators would bless a deal if Carlyle teamed up with a local fund. Mainland private equity firms, including the state-backed Bohai fund, have recently approached Carlyle to discuss a possible co-investment in Xugong. Mei Xinyu, a researcher at the International Trade Research Institute, part of the Ministry of Commerce, said: "I think it has become more difficult for the deal to be approved. Xugong may also have changed its mind and it may turn to domestic investors in order to reduce possible resistance." However, one person familiar with the discussions said: "Even an alliance with a domestic fund cannot guarantee regulatory approval. There are too many ministries involved and they often have competing agendas." Some analysts and dealmakers also believe the proposed high-profile Carlyle investment has fallen victim to the bilateral disagreements between the US and China over market access.
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