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US group admits defeat amid hostility to its bid
The Carlyle Group has finally admitted defeat in its battle to buy a stake in Xugong Group, the mainland's biggest maker of construction equipment, a deal widely seen as a litmus test of the country's openness to foreign investment.
Carlyle and Jiangsu-based Xugong released a joint statement yesterday saying that the investment agreement signed nearly three years ago had expired and Xugong would not go ahead with its planned equity sale to the US private equity firm.
'While we are not proceeding with the investment at this point in time ... both parties believe that Xugong's expansion will create opportunities for partnership with Carlyle and its portfolio companies worldwide,' the statement said.
The  deal's failure resolves a three-year feud between conservative officials opposed to selling state assets to foreign groups  and foreign critics  of mainland protectionism.
Carlyle  agreed to pay US$375 million for an 85 per cent stake in state-owned Xugong in October 2005.
But it was forced to scale back its planned purchase to 50 per cent for about US$230 million a year later and to 45 per cent in March last year after Beijing refused to sanction the sale.
Carlyle's failure to gain  official approval  came amid fierce public criticism that Beijing was selling key state assets to foreigners too cheaply, particularly stakes in  major banks.
Mainland lawmakers  passed a regulation in 2006 - under which Carlyle's bid for Xugong was reviewed - requiring special  scrutiny for foreign takeovers of domestic  firms to protect 'national economic security'.
That regulation has since been replaced by a broader 'national security' clause in the new anti-monopoly law which lawyers said should have given  critics of the sale a slimmer legal basis for opposing  the bid.
Analysts said a key factor behind the depth of opposition to the deal was the strength of nationalistic sentiment drummed up by critics. In an  internet campaign, an executive at another mainland machinery maker said that selling Xugong would amount to 'selling out the country'.
'The opposition had already been created. It's difficult to compromise a position once it's become a political issue,' said Lester Ross, a managing partner in law firm WilmerHale's Beijing office.
Opponents were also miffed by the size of the stake targeted by Carlyle in an industry unprotected by official caps on overseas investment. Foreign banks, for example, are allowed a maximum stake of 19.9 per cent in mainland lenders.
Despite  the setback, Carlyle remains active  on the mainland with investments in more than 30  firms into which it ploughed  more than US$1.3 billion in the past two years.
Last year, it completed three deals including  buying a  49 per cent stake in Yangzhou Chengde Steel Tube  and taking its stake in China Pacific Insurance Group to 17.3 per cent.
Popular opposition
Deal aroused nationalist sentiment against cheap disposals of state assets
Beijing refused to sanction Carlyle's original deal to pay Xugong US$375 million for a stake of: 85%



Carlyle, Xugong ditch contentious stake deal