By LAURIE BURKITT
BEIJING—Nestlé SA's US$1.7 billion offer for Chinese candy maker Hsu Fu Chi International Ltd. marks an effort by the Swiss foods company to gain on rivals in a fast-growing market by tapping directly into local tastes.
Nestlé plans to buy 60% of Hsu Fu Chi, the companies said Monday, in a deal that values the Singapore-listed company at 3.5 billion Singapore dollars (US$2.87 billion). If completed, the acquisition would be one of the largest foreign takeovers of a Chinese company and would give Nestlé control of the second-biggest confectionery company in China, after Mars Inc.
The bid is part of a broader push by Nestlé, maker of brands such as Nescafe, Kit Kat and Purina, to increase its sales from emerging markets to make up nearly half of the company's total within a decade from about one-third now.
Annual sales in China's confectionery market—including chocolate, candies and gum—climbed 63% to more than US$9.2 billion from 2005 to 2010, according to research firm Euromonitor. Chinese candy consumption per person is still small, and analysts see bigger growth ahead as a wealthier population develops a bigger sweet tooth. China's 1.34 billion people ate 13.7 million metric tons of candy last year, slightly more than half the 26.8 million tons eaten by the 310 million people in the U.S.
Foreign candy makers have targeted China for years, but the Hsu Fu Chi deal would move Nestlé into less-familiar territory: Chinese confections. Hsu Fu Chi's sweets includes cookies with flavors like sweet onion and cucumber, and ping-pong-ball-size cups of hawthorn- or lychee-flavored gelatin custard slurped up by Chinese children.
Nestlé offered to pay S$4.35 a share (US$3.56) for a 43.5% stake in Hsu Fu Chi. If that succeeds, Nestlé then would seek another 16.5% from members of the founding Hsu family, who still own a significant stake, and who would indirectly hold the remaining 40%.
Hsu Fu Chi's shares, trading of which had been suspended since July 4 amid news of the Nestlé talks, resumed trading Monday and rose above the offer price to S$4.40. That indicated that some investors see the possibility of a higher offer.
The Hsu Fu Chi bid reflects wider efforts by global consumer-goods companies to tailor their product portfolios better to Chinese tastes. Kraft Foods Inc. last year started selling green-tea flavored Oreos. McDonald's Corp. offers a red-bean ice-cream sundae.
Nestlé in April bought a 60% stake in China's Yinlu Food Groups Co., which makes peanut-flavored drinks and canned rice porridge. Nestle's main confectionery product in China is a chocolate-covered wafer bar called Crispy Shark. Sales of Crispy Shark have roughly doubled in the past five years, according to Euromonitor.
In addition to filling Nestlé's cupboard with more local products, the Hsu Fu Chi deal also would open up nationwide distribution channels, said Torsten Stocker, a Hong Kong analyst for Cambridge, Mass., consulting firm Monitor Group. Nestlé has been looking for ways to reach lower-income consumers by expanding distribution to mom-and-pop shops in emerging markets. Hsu Fu Chi directly distributes to around 16,000 retail outlets, according to the company's website.
The deal "is a major short-cut to growth," Mr. Stocker said.
Analysts differed in assessing the deal, which they valued at about 16 times Hsu Fu Chi's core earnings last year.
The deal is subject to regulatory approval, including from antitrust authorities at China's Commerce Ministry. The ministry didn't respond to a request for comment. Chinese regulators in 2009 rejected a US$2.4 billion bid by Coca-Cola Co. to buy drinks maker China Huiyuan Juice Group Ltd., a deal that at the time would have been the biggest foreign takeover in China.
If Nestlé's bid is successful, the company said it would delist Hsu Fu Chi from the Singapore Exchange.
The confections market is fragmented in China, with several big domestic players, such as state-owned Shanghai-based Bright Food (Group) Co., known in part for its popular White Rabbit chewy milk candies.
Hsu Fu Chi, founded in 1992 and based in southern China's Guangdong province, had 4.2% of China's candy market in 2009, the latest year for which Euromonitor has data. That placed it in a tie for second place with Perfetti Van Melle SpA of Italy, maker of Mentos. Hsu Fu Chi reported a profit of 602 million yuan (US$93.1 million) on revenue of 4.3 billion yuan in the year through June 2010.
Mars, which entered China in 1993, had 15.5% of the candy market in 2009. It took decades to build that No. 1 position. The company's best-selling candy bar in the U.S., Snickers, was relatively unknown to Chinese consumers until Mars ran a major marketing campaign to sponsor the 2008 Beijing Olympics.
Many companies have had to go to greater lengths in China than they do in other markets, altering the sizes of their products to sell at prices that most Chinese can afford, and changing packaging to make smaller products look bigger, said Max Magni, head of the consumer practice at consulting firm McKinsey & Co. Greater China.
—Alison Tudor Sam Holmes and Yoli Zhang contributed to this article.
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