Carlyle agrees to seminal Chinese buyout

The US buyout outfit has completed what is believed to be the first acquisition of a controlling interest in a former Chinese state-owned enterprise by a private equity firm.

Carlyle Group, the Washington DC-headquartered global buyout firm, has agreed to acquire an 85 percent stake in China’s Xugong Group Construction Machinery Co for RMB3 billion ($375 million).

Xugong develops, makes and markets a range of products including the likes of hydraulic cranes, road compaction and surfacing machinery, earth moving and loading machinery and construction equipment. In the year to December 31 2004, the firm’s total sales were RMB6.6 billion. 
China has seen a trickle of large private equity deals in recent times, including Carlyle Group’s agreement last month to pay $400 million for a 25 percent stake in China Pacific Life Insurance; and Warburg Pincus’ $100 million investment in Harbin Pharmaceutical in exchange for a 22.5 percent stake in December 2004.

But the Xugong deal is widely reported to be the first time a private equity firm has acquired a controlling stake in a former Chinese state-owned business.

Carlyle has purchased its stake in Xugong from Xuzhou Construction Machinery Group (XCMG), which is wholly owned by the city government of Xuzhou and which is retaining a 15 percent interest in the firm.

In a statement, Carlyle said the agreed deal followed a “lengthy and rigorous auction process, with two rounds and six international bidders”. The auction was conducted by the Xuzhou Asset Exchange Centre in accordance with central and local government regulations on the transfer of state-owned assets. JP Morgan acted as financial adviser to XCMG and Xugong.

The statement added that the rationale for the deal is to expand the national Xugong brand internationally, as well as to improve management expertise and corporate governance and provide capital for the structural reform and growth of the business.

Said XD Yang, managing director and co-head of the Carlyle Asia Buyout Group: “The Xugong management team has built a solid business, and we look forward to working with them to create a leading international construction equipment company with deep roots in China’s fast developing industrial sector and creating an international brand.”

The deal has obtained local Xuzhou government approval, but is now awaiting approval at both provincial and central government levels.