Nestle buys Hsu Fu Chi

Nestlé makes major confectionery acquisition in China

Nestlé SA, the world’s largest food company, agreed to buy 60 percent of Hsu Fu Chi International, a Chinese snack and candy maker, for S$2.07 billion ($1.7 billion) to tap growth in the world’s most populous nation.

Nestlé’s cash offer of S$4.35 for each share of Singapore- listed Hsu Fu Chi is 8.8 percent above the stock’s closing price on July 8. The controlling Hsu family will own 40 percent of the confectioner after the acquisition, the companies said.

The purchase by the Vevey, Switzerland-based company will be its largest in China, where Hsu Fu Chi’s revenue in the last fiscal year grew more than three times faster than Nestlé’s worldwide sales. It’s Nestlé’s second major purchase in the Asian country after the Swiss company in April agreed to buy 60 percent of Yinlu Foods Group. In addition to Hsu Fu Chi’s cakes and traditional sweets, CEO Paul Bulcke aims to use the company’s distribution system for Nestlé brands.

“It’s a good deal,” said Andreas Von Arx, an analyst at Helvea in Zurich who rates Nestlé “accumulate.” “Yinlu gave Nestlé a good footprint in beverages in China and today’s deal gives them a good footprint in the confectionary business.”

“Hsu Fu Chi has an extensive network and quite a large number of point-of-sales in China, that’s definitely what Nestlé will be looking for,” said Eugene Ng, a Singapore-based analyst with UOB Kay Hian Pte. ‘It seems a good deal for Nestlé, given the valuation comparison with its major peers.”

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

Nestlé has 23 factories and 14 000 employees in China, with sales of 2.8 billion Swiss francs ($3.3 billion) in 2010, it said in a statement. Hsu Fu Chi, founded in 1992 by four brothers from Taiwan, has four factories and 16 000 employees in China making cereal-based snacks, packaged cakes and traditional Chinese “sachima” sweets.

Hsu Fu Chi Chairman and CEO Hsu Chen, the second oldest of the brothers, is the 25th richest man in Taiwan, according to Forbes magazine and he will continue to lead the company.

“With Nestlé, we will accelerate the development of the Hsu Fu Chi brand, its production and distribution capabilities and ensure Hsu Fu Chi’s continued growth,” he said.

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 a 6.6 percent share in 2009.

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

“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 Nestlé penetrate the mass market.”

Nestlé had cash and near cash of 8 billion francs and short-term investments worth 8.2 billion at the end of last year after selling its majority stake in Alcon to Novartis. Bulcke said June 8 that the company’s first priority with its cash is investing in existing businesses, though it’s also considering “bolt-on” acquisitions.

Source: Nestle, Bloomberg