The Carlyle Group is likely to cut the size of stake in its acquisition of Xugong Construction Machinery (Xugong), according to the Economic Observer.

The newspaper said the US private equity firm is considering cutting the size of the stake it plans to acquire in Xugong to increase the chance of passing the Chinese regulatory review.

"The company is drafting a new scheme for the acquisition, in which Carlyle's stake in Xugong will be reduced to 50 or 49 per cent," it said, quoting an unnamed source from Carlyle.

The newspaper also said the offer price for Xugong shares would be raised.

However, a Carlyle spokesperson refused to comment on the report last night.

Last October Carlyle agreed to buy 85 per cent of Xugong for US$375 million. The deal is currently still in the hands of the central government.

If it is approved, it will be the biggest-ever acquisition by a foreign investor of a controlling stake in a leading State-owned company in China.

Xugong is currently owned by Xuzhou Construction Machinery Group (XCMG), which is wholly owned by the local government of Xuzhou. The takeover has raised concerns that China is selling strategic companies to foreign investors too cheaply.

Experts say Xugong is an industry leader which produces many advanced technologies. They warn China may lose its technology to foreign competitors if many companies like Xugong are sold to foreigners.

The State Council also said key Chinese equipment makers should be kept in domestic hands,

"Big and important equipment producers must seek the opinion of the relevant departments of the State Council if they want to sell stakes to foreign investors," said a State Council statement.

"China encourages the restructuring of such companies, on the basis that the country maintains the controlling power."

According to the statement China will speed up research and manufacturing of large-scale engineering machinery to meet the needs of railway, water, transportation and other construction projects.

In June, Chinese heavy machinery manufacturer Sany Corp said it aimed to pay 30 per cent more than the Carlyle Group to buy Xugong.

The price that the Carlyle Group agreed to pay for the purchase was undervalued. Sany could pay 30 per cent more or even more, Xiang Wenbo, executive president of Sany Corp said on the company's website.

Xiang said it is not good for China's machinery industry to sell a big and important company like Xugong to a foreign company.

Sany has been planning to buy Xugong for a long time, he added.

But experts don't believe Sany has the capability to take over Xugong. And some analysts speculate Xiang's move was a deliberate attempt to draw media attention.

Commenting on the Xugong deal, the Carlyle spokesperson said: "Carlyle and XCMG have a definitive agreement on the purchase of Xugong that was announced in October 2005."

Since then both companies have continued to develop their strong relationship and commitment to the successful completion of the transaction.

"We are confident that the transaction is in the best long-term interests for the development of China's construction machinery manufacturing industry," she added.

Source: China Daily