Carlyle drops $375m deal for Chinese construction company

After nearly three years of negotiation and two revisions of the investment agreement, the two parties have decided not to proceed citing changing market conditions. Government regulation of foreign investments had thwarted the deal in the past.

The Carlyle Group and China’s Xugong Group Construction Machinery have backed away from their October 2005 investment agreement for Carlyle to purchase an 85 percent stake in the company for $375 million following the agreement’s expiration.

The two parties decided not to proceed with the investment given “significant changes in the market environment”, according to a joint statement. Xugong will independently move forward with restructuring in order to become more “integrated” and “streamlined”.

A Carlyle spokesman declined to provide further detail.

After nearly three years of working closely, Carlyle and Xugong believe that there will be opportunities for partnership with Carlyle and its portfolio companies in the future.

In 2006, approximately a year after the original agreement, the Chinese government tightened regulations surrounding foreign investments and outlined new rules aimed at protecting strategic state assets from falling into foreign hands. The agreement was reduced to the acquisition of a 50 percent stake for approximately $220 million in a move aimed at winning approval from the Chinese government for the deal.

In 2007, despite Carlyle accepting a 45 percent minority stake, the deal remained in limbo.

Washington, DC-headquartered Carlyle has invested in more than 30 Chinese companies to date and has deployed $1.3 billion (€829 million) of equity in country over the last two years alone.

Earlier this month, the firm agreed to invest $87m in Sinorgchem, China's largest producer of rubber antioxidant chemicals.

Carlyle Asia Partners makes control or strategic minority investments in Asia ex-Japan. It has more than $2.5 billion in management in two funds and is currently raising a third targeting $2 billion, according to the Probitas Partners 2008 Private Equity Deskbook.