Nestlé Opened Preliminary Discussions with Hsu Fu Chi

The food giant Nestlé has opened preliminary discussions with the Chinese group Hsu Fu Chi International (徐福记). However, an agreement was not yet in sight.

The Swiss group Nestlé would expand its presence in China by acquiring the confectioner Hsu Fu Chi International, whose market value is estimated at 2.6 billion dollars. Discussions between the two groups would be held on an irregular basis for two years and their outcome would remain uncertain, according to Bloomberg, citing sources familiar with the matter.

Negotiations still have many obstacles to overcome and the contract could not be realized for weeks. In addition, other groups might be interested in the listed company in Singapore. This would be one of the largest takeovers of a Chinese company by a foreign group. Hsu Fu Chi International products include candies, chocolates, pastries, Chinese cakes. Nestlé could thus strengthen its confectionery division, which accounted for 11% of total revenues in 2010 and posted an organic growth of 7%.

Nestlé said that discussions with the Chinese company were only at a “preliminary” stage, without giving details. For its part, Hsu Fu Chi stated that “it has engaged in preliminary discussions with Nestle and confidential for a possible transaction,” but said there was “no certainty that a transaction to materialize.” “In order to develop the company and its brands, the group’s long-standing strategic discussions with potential partners in the confectionery market, including Japan, Europe and the United States,” also noted the Chinese group.

Nestlé is not at its first sign of interest in China this year. In April 2011, the Swiss group has signed an agreement to acquire a 60% stake in its Chinese partner Yinlu Foods Group. The latter is the co-manufacturers of Nescafe instant coffee in China and achieved a turnover of around 600 million euros in 2010. The Chinese group has also specialized in the marketing of canned milk, peanut and rice porridge. “This acquisition foreshadows our long-term investment in China and our willingness to further develop local brands,” indicated Paul Bulcke, CEO of Nestlé.

At present, the Swiss food giant owns 23 plants and two research and development centers in China, with 14,000 employees. In 2010, sales of Nestle in China rose 11% to 2.1 billion euros, or 2.5% of total turnover. The Swiss produced in China beverage, dairy and ice cream, prepared meals, confectionery, food stuffs.

For Nestlé, strengthen business in China could be part of its growth strategy in emerging markets. Indeed, the Swiss group wants to achieve 45% of its revenues in emerging markets in 2020, against 36% currently. These activities have grown organically by 11.5% last year. In these countries, infant nutrition products, chocolate, coffee, or water, already have a successful result. In contrast, frozen and prepared meals do not yet have a significant demand, says Nestlé.

On Wednesday, the value Nestlé lost 0.19% to 52.95 Swiss francs on the Zurich stock exchange. On Monday, Hsu Fu Chi has announced the “voluntary” suspension in the Singapore Stock Exchange, to avoid “abnormal fluctuations”.