Nestle buys 60pc of Chinese candymaker for US$1.7b

SINGAPORE/ZURICH: Nestle, the world's largest food company, is paying a hefty US$1.7 billion for a 60 per cent stake in candymaker Hsu Fu Chi International to move deeper into fast-growing markets in China.

Nestle's biggest deal in China so far will take it closer to its target of 45 per cent of sales from emerging markets in about 10 years, and analysts said on Monday securing growth opportunities in China was worth a relatively high price.

"It is certainly not cheap but that is the price you have to pay to get access to this high-growth market," Vontobel analyst Jean-Philippe Bertschy said.

"The fact that Hsu Chen will continue to lead the company is also very positive because he must be very well linked and have a well-established distribution network," he said.

International companies have been rushing to expand in Asian markets, where buoyant economic growth has boosted consumers' purchasing power.

On Monday alone, Asia-related deals worth some US$15 billion were announced, such as Dutch group Philips's buy of Chinese appliance firm Povos.

Nestle paid about 3.3 times sales for the stake, more than the 2.4 times U.S. food group Kraft Foods paid for British candy group Cadbury.

The Nestle deal was relatively expensive when compared with top deals in the food sector. Only Mars Inc had to put more on the table for Wrigley at 4.2 times sales in 2008 and Danone for Numico at 4.5 times in 2007.

Kepler Capital Markets analyst Jon Cox said: "The deal makes strategic sense as, inevitably, China will become the biggest market for confectionery in the future. It looks a bit expensive at 3.5 times sales at first glance but you are paying for the future growth prospect."

The Vevey-based maker of KitKat chocolate bars and Nescafe coffee strengthened its dairy business in China earlier this year when taking a 60 percent stake in Yinlu Foods Group for an undisclosed sum.

"Together with Yinlu Foods and Hsu Fu chi, Nestle will increase its Chinese business from around 2.8 billion Swiss francs (US$3.35 billion) in 2010 to 4.2 billion francs," Helvea analyst Andreas von Arx said.

The deal will allow Nestle to increase its footprint in emerging markets and get closer to catching up with rivals Danone and Unilever, von Arx said.

Gaining access to Hsu Fu Chi's comprehensive distribution network was also key for Nestle which has been present in China for over 20 years, operates 23 factories and employs 14,000 people.

Hsu Fu Chi, which makes sugar sweets, cereal-based snacks, cakes and the traditional Chinese snack sachima, is listed in Singapore and reported sales of 669 million Swiss francs in 2010. It employs 16,000 people.

"The outlook for China's consumption demand is quite positive," said Dan Bin, a fund manger at Shenzhen-based Eastern Bay Investment Management, which invests in consumer companies. "Nestle has a lot of experience in consumer brands and with the deal, they can build on what Hsu Fu Chi already has in the Chinese market."

Under their agreement, Nestle will buy 43.5 per cent of Hsu Fu Chi's shares from independent shareholders at S$4.35, a premium of 8.7 per cent over the July 1 closing price -- trading in the Dongguan-based company's shares were halted on July 1 when the companies said they were in talks.

If the scheme is approved by the independent shareholders, Nestle will acquire a 16.5 per cent stake from the Hsu family, which founded the company in 1992 and leaving it with 40 per cent. The company will then be delisted. -- Reuters