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Prices Force Blackstone to Drop China Stake

Blackstone pulled out of its investment in a Chinese agricultural company earlier this year after the mainland group warned the buy-out firm that its involvement would complicate moves to raise prices, according to three people familiar with the matter.

Citizens purchase goods at a supermarket in Beijing, China.
Chinafotopress | Getty Images AsiaPac
Citizens purchase goods at a supermarket in Beijing, China.

The case offers a stark illustration of the sensitivity surrounding rising prices as China seeks to combat inflation running at a three-year high.

The US private equity firm sold its stake in Dili Group, the parent company of a Shandong province vegetable trader, just weeks before Unilever was fined in China for announcing planned price rises.

“Raising prices on food is sensitive, especially when a foreign private equity firm is involved,” said one person with knowledge of the matter.

Chinese leaders have repeatedly identified inflation – particularly rising food prices – as the nation’s most pressing problem because of its potential to cause social unrest. Last week Beijing raised interest rates for the fifth time in eight months in an effort to curb inflation. Consumer prices rose 6.4 per cent in June and food prices – which increased 14.4 per cent from a year earlier – were the main driver.

In March 2010, Blackstone paid $194m for about 10 per cent of Dili as part of a five-member consortium – which included Warburg Pincus and Capital International, a US-based investment firm – that took an overall 30 per cent share. In the first quarter of 2011, Blackstone sold the holding back to Dili, reaping a 16.5 per cent return, according to its quarterly investor letter.

Capital did not respond to inquiries about its stake. While Warburg still has a $10m holding, according to two people familiar with the deal, Blackstone’s involvement is considered more controversial because of a previous investment in the US firm by China Investment Corp, the country’s sovereign wealth fund.

When CIC was in its infancy, it took a 10 per cent stake in Blackstone ahead of the US firm’s public listing in 2007. That investment has sparked resentment in China towards both Blackstone and CIC because, on paper, it is worth less than CIC paid for it.

The Blackstone move to sell its stake in Dili reflected mutual agreement that the Chinese company would have more flexibility to raise prices without the presence of the US firm.

Dili is controlled by the brother-sister duo Dai Yongge and Xiuli Hawken, real estate entrepreneurs who run the Hong Kong-listed Renhe Commercial Holdings. Its main asset is a big vegetable trading park in the eastern city in Shouguang which is known as China’s “vegetable capital”.

Chinese crop traders have been squeezed over the past year as Beijing tried to tackle rising food prices, often resorting to implicit price controls. Dili declined to comment and it could not be determined whether the company went on to raise prices.

When the foreign consortium invested in Dili, food inflation was less of a concern. It also expected regulatory approval for new distribution channels. But as rising prices became more of an issue and regulatory green lights less certain, the upside for the foreign investors dimmed, the people familiar with the arrangement said. As a result, the timing of a planned listing in Hong Kong, originally set for the first half of 2011, has been postponed indefinitely.