Nestle in early-stage discussions with Hsu Fu Chi

Nestle SA said it’s in preliminary discussions with Hsu Fu Chi International Ltd, China’s biggest confectioner by market value, as it seeks to increase its revenue from emerging markets.

Hsu Fu Chi said yesterday that Vevey, Switzerland-based Nestle is assessing a bid and the two companies have been in talks on a partnership for a few years. Talks are also being held with other potential suitors, said Christine Sun, a spokeswoman for the Dongguan, Guangdong province-based company. Nestle has “no further comments to make at this stage,” spokeswoman Nina Caren Backes said in an e-mailed statement.

Hsu Fu Chi is valued at S$3.2 billion ($2.6 billion) on the Singapore exchange, where its shares were suspended before the start of trading yesterday. Nestle, the world’s largest food maker, had more than 16 billion Swiss francs ($18.8bn) of cash at the end of last year and has said it will consider making “bolt-on” acquisitions. The Swiss company aims to get 45 per cent of revenue from emerging markets by 2020.

“Strategically, we would view the deal positively since it would give Nestle access to China’s fast-growth $6 billion confectionery market and allow the group a number of international cross-selling opportunities,” MF Global analysts including Andy Smith wrote yesterday in a research note.

Nestle amassed a cash pile after receiving $28.3bn in August for a majority stake in the Alcon eye-care division. The food company has mostly shied away from major acquisitions, its biggest recent purchase being Kraft Foods Inc’s North American pizza business for $3.7bn in March 2010.

Buying Hsu Fu Chi would give Nestle access to nationwide distribution in China’s confectionary market, according to researcher Euromonitor International. Hsu Fu Chi, which generates all its revenue in China, may need Nestle to expand overseas, according to 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. “Having somebody like Nestle, who has a really strong international network, really helps those brands.”

An acquisition of all of Hsu Fu Chi at its current market value would be the largest on record of a Chinese firm by a company based outside the country, according to Bloomberg data.

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 because of concern that 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.

Nestle’s sales in emerging markets need to increase at least 8 per cent to 10 per cent a year for the company to reach its goal, according to Frits van Dijk, head of the company’s business in Asia, Africa, Oceania and the Middle East.

“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 first sold shares to the public in Singapore in December 2006, is also talking to companies in the US, 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.

Hsu Fu Chi’s profit rose 31 per cent to 602.2 million yuan ($93 million) in 2010 as sales climbed 14 per cent to 4.3 billion yuan, according to Bloomberg data. The shares have risen 72 per cent in the past year.