Nestle to Buy 60% Stake in Hsu Fu Chi for $1.7 Billion
July 11, 2011, 6:15 AM EDTBy Bloomberg News
(Updates with new analyst comment in fourth paragraph.)
July 11 (Bloomberg) -- Nestle SA, the world’s largest food company, 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 growth in the world’s most populous nation.
Nestle’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 today.
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 Nestle’s worldwide sales. It’s Nestle’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, Chief Executive Officer Paul Bulcke aims to use the company’s distribution system for Nestle brands.
“It’s a good deal,” said Andreas Von Arx, an analyst at Helvea in Zurich who rates Nestle “accumulate.” “Yinlu gave Nestle a good footprint in beverages in China and today’s deal gives them a good footprint in the confectionary business.”
Nestle fell 25 centimes, or 0.5 percent, to 52.35 Swiss francs at 11:48 a.m. in Zurich trading. Hsu Fu Chi gained 10 percent to S$4.40 as of the 5:10 p.m. close of trading in Singapore. The Dongguan, Guangdong-based company is trading at 26 times earnings, according to Bloomberg data, compared with 34.6 times for rival foodmaker Tingyi (Cayman Islands) Holding Co. and 35.4 times for Want Want China Holdings Ltd., a snack maker and flour supplier.
Nestle in China
“Hsu Fu Chi has an extensive network and quite a large number of point-of-sales 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.”
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 ($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.
Shareholder Agreement
The purchase “enhances our ability to grow our portfolio of international and local brands in this dynamic market,” Bulcke said in the statement.
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.
Hsu Fu Chi’s two largest independent shareholders have agreed to vote for the transaction, according to the statement. Units of the Baring Asia Private Equity Fund hold 16.5 percent of the stock, while Arisaig Partners Holdings owns 9 percent. Hsu Fu Chi shares will be delisted from the Singapore exchange after the acquisition is completed.
Hsu Fu Chi’s profit rose 31 percent to 602.2 million Chinese yuan ($93 million) in fiscal 2010 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,” Chairman Hsu Chen said in the 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 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 Nestle penetrate the mass market.”
Nestle 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 Inc. to Novartis AG. 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.
Credit Suisse is advising Nestle on the purchase.
--Michael Wei, Dermot Doherty. Editors: Dave McCombs, Paul Jarvis.
To contact Bloomberg news staff for this story: Thomas Mulier in Geneva at tmulier@bloomberg.net; Michael Wei in Shanghai at mwei13@bloomberg.net
To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net; Dave McCombs at dmccombs@bloomberg.net
