Carlyle backs down on Xugong

US buyout firm The Carlyle Group has had to settle for a minority stake in Xugong, a Chinese construction machinery manufacturer that it has been trying to buy outright since 2005. The proposed sale caused an outcry in China.

The Carlyle Group has bowed to political pressure in China and accepted a reduced 45 percent minority stake in Xugong, a Chinese company that makes machinery for the construction industry.

Carlyle originally offered $375 million for an 85 percent stake in Xugong in 2005, a deal which was approved by the local authorities. However, the prospect of Xugong passing into foreign control caused an outcry in China, and the state government subsequently refused to sanction the sale. This in turn prompted the US government to express concerns about protectionism in China, since the deal was widely seen as a litmus test for Chinese state attitudes to foreign investment.

Carlyle attempted to mollify opposition to the bid by reducing its proposed stake to 50 percent last year, but it has now been forced to cut that once again, to 45 percent, as the deal remained in limbo.

Under the latest terms of the deal, Xugong said Carlyle would receive four of the nine seats on the company’s board.

After the uproar surrounding the deal, the Chinse government has tightened its regulation of foreign investment. All buyout deals in the sector must now be approved by the Chinese government, which could put off potential investors.