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Carlyle Further Lowers Xugong Bid
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US private equity firm The Carlyle Group has made a further concession as it seeks to acquire Xugong Group Construction Machinery Co Ltd (Xugong), agreeing to reduce its stake from 50 to 45 percent.

Xugong's agreement with Carlyle provides a marked-down 45 percent stake for the US firm, it said in a statement to the Shenzhen Stock Exchange yesterday, following Carlyle's original concession to drop its offer from 85 percent to 50 percent.

The new agreement would give Xuzhou Construction Machinery Group (XCMG), owned by the Xuzhou local government, a 55-percent controlling stake in Xugong and five seats on the board as opposed to Carlyle's four.

The statement disclosed no financial details, and pointed out central government approval was still pending.

The revised agreement will also see regulators closely oversee mergers and acquisitions, stated an analyst who declined to be named.

Jenny Ma, vice-president of THTB Capital Ltd said that "the Xugong deal was vital to Carlyle as it could have an impact on further acquisitions in China."

The conditions surrounding the deal illustrates the government's attitude in slowly allowing foreign access to key industrial assets, said Ma, who assisted Royal Dutch Shell in buy a 75-percent stake in China's largest privately-owned lubricant oil company Tongyi last year.

The Carlyle-Xugong deal was first discussed in October 2005, when Carlyle agreed to buy 85 percent of Xugong for US$375 million. Had this gone ahead, it would have represented the largest controlling stake acquisition by a foreign investor of a leading State-owned company in China.

The takeover bid has sparked off concerns that foreign investors may be able to snatch Chinese strategic companies at bargain prices, a move that would sever these companies' long-standing ties to the central government.

Some analysts have raised further fears of seeing China could lose its technological edge to foreign competitors if important firms like Xugong are sold off to overseas companies, adding that such sales could also impact negatively on national economic security.

Last August, the Ministry of Commerce and other authorities issued new rules on the acquisition of Chinese enterprises by foreign investors.

New rules, which came into being on September 8, provide for three acquisition scenarios whereby central authorities must be notified: if the foreign bidder wishes to control over 20 percent and has annual sales in China worth over 1.5 billion yuan; if the market share of one of the parties involved in the deal reaches 25 percent after the acquisition; or if the foreign bidder has made over 10 acquisitions of 10 Chinese enterprises within one year.

The Chinese government is currently reviewing several such cases, such as the proposed US$269 million purchase of part of Laiwu Steel Corp by Arcelor Mittal, the world's biggest steelmaker. The deal, harking back to last February, saw Arcelor agree to buy 38.41 percent of Laiwu, based in eastern Shandong Province.

(China Daily March 20, 2007)

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