Chinese To Carlyle: Oh No You Don't

U.S. private equity firm agrees to buy minority stake, after earlier bid for majority share of Xugong Group Construction Machinery was rejected.

BEIJING (AP) – U.S. private equity firm Carlyle Group has agreed to buy a minority stake in Xugong Group Construction Machinery Co., the Chinese construction company said Monday, after an earlier bid for a majority share prompted a nationalist outcry.

The deal has been closely watched amid U.S. government warnings about possible Chinese protectionist sentiment.

The agreement would give Carlyle 45 percent of a joint venture formed with Xugong, the company said in a statement released through a Chinese stock exchange in the southern city of Shenzhen.

It didn't give a price and said the deal still requires Chinese government approval.

This marks the second time Carlyle cut the size of the stake it was seeking. In 2005, Carlyle offered $375 million for 85 percent of Xugong, which said it wanted the investment in order to grow in a market dominated by Caterpillar Inc. and Japan's Komatsu Ltd.

But that bid, which was endorsed by local Chinese authorities, sparked complaints in China about asset sales to foreigners _ which in turn prompted Washington to express concern about the handling of such offers. Carlyle last year reduced the stake it wanted to 50 percent.

Even though China got some $60 billion in foreign investment last year, the foreign takeover of existing companies is still unusual.

A woman who answered the phone Monday in the office of Xugong's president refused to release additional details. A Carlyle spokeswoman did not immediately respond to a phone message.

The new deal will give Washington-based Carlyle four seats on the nine-member board of the new joint venture, said Xugong, which is based in the eastern Chinese city of Xuzhou. The Chinese company will get five seats and appoint the chairman.

Carlyle is one of the world's largest private equity funds, with $44 billion invested around the world in industries ranging from manufacturing and power generation to media and telecoms.

After the uproar over the Carlyle bid, the Chinese government announced that makers of construction equipment must consult Beijing before selling large stakes to foreigners.

Senior Chinese officials reportedly held an unprecedented meeting last year to decide how to proceed on the Xugong deal.

U.S. officials have expressed concern that official Chinese support for foreign participation in the country's economy might be weakening now that the country has met its market-opening pledges to the World Trade Organization.

In a December report, the U.S. Trade Representative's office said Chinese market liberalization slowed in 2006.