The purchase would be Nestle SA's largest acquisition in China, where Hsu Fu Chi's sales grew more than three times faster than Nestle's worldwide sales during the most recent fiscal year. Sha Lang / For China Daily

Controlling family of Hsu Fu Chi will hold 40 percent of company

GENEVA / SHANGHAI - Nestle SA, the world's largest food company, has agreed to buy 60 percent of Hsu Fu Chi International Ltd, a Chinese snack and candy maker, for S$2.07 billion ($1.7 billion) to tap rising demand for sweets in the world's most populous nation.

Nestle offered S$4.35 in cash for each share of Singapore-listed Hsu Fu Chi, an 8.8 percent premium over the stock's closing price on Friday. The controlling Hsu family will own 40 percent of the confectioner after the acquisition, according to a joint statement by the companies.

The purchase would be the Vevey, Switzerland-based company's largest acquisition in China, where Hsu Fu Chi's sales last fiscal year grew more than three times faster than Nestle's worldwide sales. In addition to Hsu Fu Chi's cakes and traditional sweets, Chief Executive Officer Paul Bulcke aims to use its distribution system for Nestle brands.

"Hsu Fu Chi has an extensive network and quite a large number of outlets in China, that's definitely what Nestle will be looking for," said Eugene Ng, a Singapore-based analyst with UOB Kay Hian Pte Ltd. "It seems a good deal for Nestle, given the valuation comparison with its major peers, such as Tingyi and Want Want."

Hsu Fu Chi gained 35 Singapore cents on Monday to the S$4.35, the offer price. The Dongguan, Guangdong-based company is trading at 23.9 times earnings according to Bloomberg data, compared with 34.7 times for rival foodmaker Tingyi (Cayman Islands) Holding Co and 36 times for Want Want China Holdings Ltd, a snack maker and flour supplier.

Nestle in China

Nestle's Bulcke, 56, has set a goal of getting 45 percent of revenue from developing countries by 2020, compared with about a third now.

The maker of Nescafe instant coffee, After Eight mints and Kit Kat candy bars, has 23 factories and 14,000 employees in China, with sales of 2.8 billion Swiss francs in 2010 ($3.1 billion), it said in the statement. Hsu Fu Chi, founded in 1992 by four brothers from Taiwan, has four factories and 16,000 employees in the mainland making cereal-based snacks, packaged cakes and traditional Chinese "sachima" sweets.

"This proposed partnership will greatly reinforce our presence in China," said Bulcke. The purchase "enhances our ability to grow our portfolio of international and local brands in this dynamic market."

Credit Suisse SA is advising Nestle on the acquisition.

Hsu Fu Chi Chairman and Chief Executive Officer Hsu Chen, the second-oldest of the brothers, is the 25th-richest man in Taiwan, according to Forbes magazine. Hsu Chen will continue to lead the company, the statement said.

Shareholder Agreement

Units of the Baring Asia Private Equity Fund, which hold 16.5 percent of Hsu Fu Chi and Arisaig Partners Holdings, which owns 9 percent, the two largest independent shareholders, have agreed to vote for the transaction, according to the statement.

The company will be delisted from the Singapore exchange after the acquisition, said the statement.

Hsu Fu Chi's 2010 profit rose 31 percent to 602.2 million yuan ($93 million) as sales increased 14 percent to 4.31 billion yuan, according to Bloomberg data.

Sales of Sweets

"With Nestle, we will accelerate the development of the Hsu Fu Chi brand, its production and distribution capabilities and ensure Hsu Fu Chi's continued growth," said Chairman Hsu Chen, in a statement.

Sales of sweets in China rose 5 percent to 40 billion yuan in 2010, according to researcher Euromonitor International. Hsu Fu Chi led the market with 6.6 percent share in 2009.

Hsu Fu Chi's strategy of offering almost 500 different products requires that it maintains its own distribution network, Stephen Hui, a Singapore-based analyst with Standard Chartered Bank Plc, said in a report on July 4.

"Hsu Fu Chi's direct distribution network forms a large barrier to entry" for competitors, Hui wrote in the report. "Hsu Fu Chi's wide product offering also targets a wide audience and could help Nestle penetrate the mass market."

Nestle had cash and near cash of 8 billion Swiss francs and short-term investments worth 8.2 billion at the end of last year after it sold its majority stake in Alcon Inc, a maker of contact lens solutions, to Novartis AG.

Bulcke said on June 8 the company's first priority with its cash is investing in existing businesses, though it's also considering "bolt-on" acquisitions.

Bloomberg News