Deal would help food giant grow its share of the Chinese market

SHANGHAI - The proposed takeover of Chinese snack and candy maker Hsu Fu Chi International Ltd by Nestl SA, reported by the Wall Street Journal, is very likely to be approved by Chinese regulators, analysts said.

"China's confectionery sector is a fully competitive industry where mergers and acquisitions naturally arise," said Huang Shichuan, a food and beverage industry analyst with Southwest Securities.

"Chinese regulators have become more open to foreign mergers and acquisitions in the industry, which is not strategically important. I think price is the major determinant for this deal."

The Wall Street Journal reported on Sunday that Nestl, the world's largest food company by sales, is negotiating to buy Guangdong province-based Hsu Fu Chi, which has a market capitalization of $2.6 billion. A deal would be one of the biggest foreign takeovers of a Chinese company.

But any agreement is weeks away, as talks are at a delicate stage and there are several hurdles to overcome, the newspaper quoted an anonymous source as saying.

Officials from Nestl and Hsu Fu Chi couldn't be reached for comment on Monday.

A deal would come amid a strategic shift by foreign food and beverage giants, which are increasingly turning to mergers and acquisitions, rather than organic growth, to expand in China, Huang said.

"Foreign beverage and food makers tried to grow organically in China but had limited success," so they are turning to mergers and acquisitions, he said.

Several such deals have been proposed or completed recently in the industry.

Nestl announced in April that it bought a 60-percent stake in Chinese food company Yinlu Food Group. The price was not disclosed.

In May, Yum! Brands Inc, owner of the Kentucky Fried Chicken fast-food chain, offered to buy Little Sheep Group Ltd in a deal that valued the operator of hot pot restaurants at HK$6.7 billion ($861 million). Last week, British liquor giant Diageo PLC ended a 16-month wait for Chinese regulatory approval for its bid to take control of a local Sichuan white-spirits maker, Shui Jing Fang Joint Stock Co Ltd, which Huang said is a sign that Chinese regulators have become more open to such deals.

In 2009, Coca-Cola Co's $2.4 billion bid to buy Chinese soft drink maker Huiyuan Juice Group Co was rejected by Chinese regulators.

Hsu Fu Chi, which sells candies, cakes and pastries, is listed in Singapore. The 19-year-old company reported a 31-percent rise in 2010 profit to 602.2 million yuan ($93 million), with sales up 14 percent to 4.31 billion yuan.

According to Euromonitor International, a London-based market research firm, Hsu Fu Chi had a 3.9-percent share of China's 58-billion-yuan confectionery market in 2008, when Nestl had a share of 1.6 percent. Acquiring Hsu Fu Chi would help Nestl achieve its goal of generating 45 percent of revenue from developing economies, including China, by 2020, compared with about a third at present.

Guodu Securities analyst Xu Hao said that China's food and beverage market will experience a "golden era" of growth over the next five years. "The 12th Five-Year Plan has given new impetus to the country's policy of boosting domestic demand, which will benefit the food and beverage industry," Xu said. "We will see rapid growth and consolidation in the sector."

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