carlyle-closes-china-deal

Carlyle closes China deal

The private equity firm buys a 49% stake in Yangzhou Chengde Steel Tube for $80 million.
Carlyle announced on March 30 that it will invest $80 million for a 49% stake in ChinaÆs Yangzhou Chengde Steel Tube Company.

Yangzhou Chengde manufactures large-diameter seamless steel pipes. CarlyleÆs investment will help Yangzhou ChengdeÆs to grow its business both domestically and in markets beyond China. The investment is housed in Carlyle Asia Partners II, a $1.8 billion fund that makes control and strategic minority investments in Asia ex-Japan.

Yangzhou Chengde supplies pipes to industries including energy, power, heavy industrial, chemical and construction with customers both in China and across the world. It was spun off from Jiangsu Chengde Steel Tube, a producer of small-diameter seamless steel tubes since 1988. Yangzhou Chengde started producing large-diameter seamless steel tubes in 2004.

Huai-De Zhang, founder and chairman of Yangzhou Chengde, draws attention to CarlyleÆs investments in industrial companies worldwide saying: ôthese networks and relationships will be a great source of potential partnerships and clientele for our companyö.

ôIn China, Carlyle has demonstrated a deep understanding of local businesses and an ability to work well with Chinese companies. The Carlyle brand will also help attract senior management talent to help expand both our domestic and overseas business,ö adds Zhang.

The parties announced the deal once all regulatory approvals were received on March 29.

Carlyle is probably taking a cue from its recent experience with Xugong.

The Xugong deal was first announced at the end of 2005. At the time, Carlyle planned to acquire an 85% stake in Xugong, a manufacturer of construction machinery, for $375 million. Carlyle was advised by Deutsche and Xugong by JPMorgan. However, regulators withheld approvals on the grounds that Xugong was of strategic importance to China and that the company being controlled by a foreign investor could cause security concerns for the country.

Over the course of 2006, Carlyle continued to negotiate deal parameters to find a solution acceptable to all. Carlyle reduced the ownership interest it was seeking to 50% and then on March 20 Xugong announced Carlyle would acquire 45%, paying around Rmb1.804 billion ($233 million). On a firm value basis, this translated to a price 16% higher than what Xugong was valued at in 2005, which was significant given that Carlyle ended up with a minority stake. The deal, even in its most recent format, has not received all necessary approvals.

The financial sponsor community has been keenly watching developments on Xugong to formulate their strategy for further China deals.

Contrary to the voices of doom, CarlyleÆs experience with Xugong, has not, it emerges, negatively impacted its ability to close deals in China. Within a fortnight of the most recent fracas surrounding Xugong, Carlyle has announced that it has signed, sealed and delivered its investment in Yangzhou Chengde.

Carlyle did not have an advisor. Yangzhou Chengde was advised by ICEA Finance, the investment banking arm of ICBC.
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