Hsu Fu Chi in talks with Nestle on possible acquisition

Hsu Fu Chi International, China’s biggest confectioner by market value, said Nestle SA is among the parties in acquisition talks for what would be the largest overseas purchase of a Chinese company.

Nestle, the world’s largest food maker, is assessing a potential bid for Hsu Fu Chi and the two companies have been in talks on a partnership for a few years, Christine Sun, spokeswoman for the Dongguan, Guangdong-based company, said by telephone today. Trading of the Hsu Fu Chi stock was suspended in Singapore pending an announcement.

An acquisition would give Nestle access to nationwide distribution in China’s confectionary market, worth about US$6 billion last year, according to researcher Euromonitor International. Hsu Fu Chi, which generates all its revenue in China, may need Nestle to expand overseas, said Ben Cavender, an analyst with China Market Research in Shanghai.

 

“They want to go international and they don’t have resources, capabilities necessary to do that themselves,” Cavender said in an interview. “Having somebody like Nestle, who has a really strong international network, really helps those brands.”

 

A Nestle acquisition of all of Hsu Fu Chi at its US$2.6 billion ($3.19 billion) market value would be the largest on record of a Chinese firm by a company based outside the country, according to Bloomberg data.

REGULATORY SCRUTINY

An overseas offer may encounter regulatory scrutiny from the Chinese government, which blocked Coca-Cola Co.’s bid for the Asian nation’s biggest domestic juice maker China Huiyuan Juice Group Ltd in 2009 on concern the tie-up would have hurt competition.

 

Discussions between Nestle and Hsu Fu Chi have been on and off for about two years, according to three people, who declined to be identified because the talks are private. It isn’t clear whether Nestle will reach a deal, and other suitors have also been examining the Singapore-listed company, these people said.

 

Nina Caren Backes, a spokeswoman for Vevey, Switzerland- based Nestle, said the company doesn’t comment on market speculation.

 

Nestle’s sales in emerging markets need to increase at least 8% to 10% a year for the company to reach its goal of getting 45% of revenue from that area by 2020, Frits van Dijk, head of the company’s business in Asia, Africa, Oceania and the Middle East, said last month at an investor conference.

 

DISTRIBUTION, LOGISTICS

“It’s very difficult for Nestle to organically grow its distribution and logistics in China,” said Cavender. “It helps for them to find companies like Hsu Fu Chi and bring their product portfolio under their umbrella.”

 

Hsu Fu Chi, which sold shares to the public in Singapore in December 2006, is also talking to companies in the U.S., Europe and Japan, Sun said. “Hsu Fu Chi wants to find a partner that will help us to forge a long-lasting brand,” Sun said. Potential buyers are from Japan, the U.S. and Europe, Sun said.

 

Hsu Fu Chi reported 2010 profit rose 31% to 602.2 million yuan ($114 million) as sales climbed 14% to 4.3 billion yuan, according to Bloomberg data. The shares have risen 72% in the past year, giving the company a market capitalization of $3.18 billion.

 

The company, founded in 1992 by four brothers from Taiwan, has 45 large-scale production plants and can make more than 700 different types of confectionery products, according to its website. Chairman and Chief Executive Officer Hsu Chen, the second oldest of the brothers, is the 25th richest man in Taiwan, according to Forbes magazine.