Report: Bohai likely to clinch failed Carlyle deal

China's first wholly domestic private equity fund is reportedly in talks with Xugong to acquire a 45 percent stake in the construction equipment manufacturer. Carlyle's bid, agreed three years prior, failed to gain regulatory approvals and stirred opposition pertaining to foreign ownership of domestic assets.

A month after talks between global buyout firm The Carlyle Group and China’s Xugong Group Construction Machinery terminated, the company is reportedly looking at selling a 45 percent stake to the Bohai Industry Investment Fund, a government-backed private equity fund in China.

Had Carlyle’s investment gone through, it would have owned a 30 percent stake in Xugong, while Bohai would have held 15 percent, the 21st Century Business Herald newspaper reported, according to news agency Xinhua.

The Bohai Industry Investment Fund is now likely to pick up the entire 45 percent stake, the paper reported, citing unnamed sources. Xugong has said that it has held talks with potential investors without disclosing other information, according to the report.

If the deal takes form, it is not likely to face opposition as the Carlyle bid did, primarily because there are no issues pertaining to domestic strategic assets being controlled by foreign entities as Bohai is a government-backed private equity fund.

Late last month, Carlyle and Xugong backed away from their investment agreement after failing to receive regulatory approval for the deal for three years. The two sides decided to terminate attempts to move the deal through due to “significant changes in the market environment”, according to a joint statement.

In October 2005, the two sides had agreed that Carlyle would invest $375 million (€255 million) to acquire an 85 percent stake in the company. However there was domestic outcry at the prospect of strategic domestic assets falling into foreign hands, and the deal was not approved by the Chinese government.
Carlyle subsequently lowered its proposed investment to $220 million for a 50 percent stake in a bid to win the approval of the authorities, but the deal was still not approved. Finally, last year, Carlyle proposed acquiring a minority stake of 45 percent, but the authorities remained unmoved, and the deal was scrapped.

Xugong manufactures and markets products such as hydraulic cranes, road compaction and surfacing machinery, earth moving and loading machinery, and construction equipment.

The Bohai Industry Investment Fund was set up in 2006 as China’s first domestic, RMB-denominated private equity fund. It is raising RMB20 billion ($2.9 billion; €2 billion).