Nestle takeover in China creates 23% return

DEAL TRACKER

Nestle SA’s biggest acquisition in China is giving traders a chance to reap a 23 per cent profit without the risk of losing any money on the deal.

Nestle agreed to buy 60 per cent of Hsu Fu Chi International Ltd, the Dongguan, Guangdong-based candy maker, for S$2.07 billion ($1.7 billion) in July. After surging above the all-cash offer of S$4.35 a share, Hsu Fu Chi gave up all the gains as stocks around the world plummeted and Nestle’s baby food recall in June raised regulatory concern over the cross-border transaction, Louis Capital Markets said. Hsu Fu Chi ended last week at S$4 - the same level prior to the announcement.

While Nestle, the world’s largest food company, needs to win antitrust approval from China for the deal, traders can lock in an annualised 23 per cent return if it closes by year end, according to data compiled by Bloomberg. Since China’s anti- monopoly law began three years ago, the ministry of commerce has blocked only one of the more than 200 takeovers it has reviewed, law firm King & Wood said. Hsu Fu Chi would give Nestle the biggest share of China’s market for sweets without dominating an industry where rivals control more than 90 per cent of sales.

“You can see a guaranteed upside,” Alick Wong, a research analyst at Louis Capital in Hong Kong, said in a telephone interview. “Technically and fundamentally it is a good trade.”

Hsu Fu Chi’s shares rose 5.3 per cent to S$4.21 on Monday in Singapore, the biggest gain since the deal was announced. Nestle slipped 0.4 per cent to 48.96 Swiss francs ($61.98) at 12.18 pm in Zurich.

Robin Tickle, head spokesman for Vevey, Switzerland-based Nestle, declined to comment on the purchase because of the review. Christine Sun, a spokeswoman for Hsu Fu Chi, said the company respects all regulatory procedures.

The ministry of commerce, known as Mofcom, didn’t respond to a faxed request for comment on Nestle’s deal with Hsu Fu Chi.

Hsu Fu Chi was founded in 1992 by four brothers from Taiwan and makes cereal-based snacks, packaged cakes and traditional Chinese “sachima” sweets. The stock trades in Singapore.

Nestle, which makes Nescafe instant coffee, Kit Kat candy bars and Jenny Craig weight-loss products, said in a statement July 11 that it agreed to take a controlling stake in Hsu Fu Chi. The rest would remain with the Hsu family, the statement said.

The deal, Nestle’s largest in China, would also be the biggest cross-border deal for a mainland company outside the banking industry since 2004 based on equity value, data compiled by Bloomberg show. Nestle, which has more than $8 billion in reserves, will pay for the transaction in cash.