Nestle confirms early-stage talks with Hsu Fu Chi

Nestle SA (NESN), the world’s largest food maker, said it is in preliminary discussions with Hsu Fu Chi International Ltd. (HFCI) after being identified as a potential suitor for China’s biggest confectioner by market value.

Nestle has “no further comments to make at this stage,” Nina Caren Backes, a spokeswoman at the Vevey, Switzerland-based company, said today in an e-mailed statement. Hsu Fu Chi said earlier that 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-based company.

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 today. Nestle sat on more than 16 billion Swiss francs ($18.8 billion) of cash at the end of last year and has said it will consider making “bolt-on” acquisitions.

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

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.