Chinese heavy machinery manufacturer Sany Group has hired a financial adviser to prepare a formal bid for Xugong Group Construction Machinery Co Ltd, the nation's biggest maker of building machinery.

The company has hired Guosen Securities Co as its financial adviser, sources close to the deal told China Daily.

An official with Guosen Securities, who declined to be named, confirmed the deal, but made no further comment.

The move might set up a takeover battle with the US private equity firm Carlyle Group, which agreed to pay US$375 million for 85 percent of Xugong last October.

Carlyle's takeover, which is the biggest-ever acquisition by a foreign investor of a controlling stake in a leading Chinese State-owned company, is still in the hands of the central government.

"During the period waiting for the final approval from the government on the transaction, we will not talk to any other investor on the purchase of Xugong," Xuzhou Construction Machinery Group Co Ltd (XCMG), parent of Xugong, said in a statement.

Commenting on its purchase, Carlyle said in a statement that it is confident that the transaction is in the best long-term interests for the development of China's construction machinery manufacturing industry and XCMG.

"We have a definitive agreement with XCMG 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," the statement said.

However Carlyle's takeover has raised concern that China has been selling its strategic companies to foreign investors too cheaply.

According to some analysts, Xugong is a leader in the industry and owns many advanced technologies. China may lose its technology to foreign competitors if many companies like Xugong are sold to foreigners.

"It is still hard to say who will win the Xugong deal finally since the government has not approved the Carlyle Group's purchase until now," said an analyst who declined to be named.

Last month the State Council issued a statement saying that key Chinese equipment makers should be controlled domestically.

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

China encourages the restructuring of such companies on the basis that the country has the controlling power, the statement said.

Earlier in June Xiang Wenbo, executive president of Sany, said on the company's website that it aimed to pay 30 percent more than Carlyle to buy Xugong.

The price that Carlyle agreed to pay for the purchase was undervalued. Sany could pay 30 percent more or even higher, he said.

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.

Privately held Sany, which controls Sany Heavy Industry Co Ltd, is based in Hunan Province. The listed subsidiary had sales of 2.54 billion yuan (US$318 million) last year.

Sany Heavy shares rose 1.23 percent to 14.85 yuan (US$ 1.85) on the Shanghai Stock Exchange yesterday, and have more than doubled this year.

(China Daily July 5, 2006)