Nestle and Hsu Fu Chi agree sweet deal

Nestle will buy 60% of Chinese confectionery company Hsu Fu Chi International for S$2.07 billion ($1.7 billion) as it seeks to strengthen its foothold in China. The founding family of the Chinese confectionery company will continue to own the remaining 40% and manage the company.

Nestle’s chief executive officer Paul Bulcke is aiming to boost revenues from emerging markets to 45% of its total by 2020, up from around one-third currently. In April this year, the Swiss food company struck a similar deal to buy 60% of Yinlu Foods. Nestle and Yinlu, which had revenues in excess of $800 million, did not disclose the price of the deal. Nestle has been operating in China for around 20 years and earns around $3 billion of sales in the country.

The Hsu Fu Chi deal is both larger and more ambitious than the Yinlu one. Nestle was familiar with Yinlu as the company is one of its suppliers, but Hsu Fu Chi was an idea that Credit Suisse took to Nestle and then helped take to the finish line, according to a source close to the deal.

Hsu Fu Chi has been scouting for a strategic partner that will help the company to grow to the next level and has agreed a 60:40 partnership that favours Nestle. The Chinese confectioner will continue to manage the business on a day-to-day basis.

The deal has taken almost a year to close, said a source, because both parties see it as more of a marriage than a sell-out. In addition, the four brothers from the Hsu family were all involved in discussions, although only Hsu Chen is expected to be involved in day-to-day management going forward.

Valuation was done using traditional methods such as discounted cashflows and comparable deals, added the source. However, he cautioned that Hsu Fu Chi is not easily compared to other consumer companies such as Tingyi and Want Want because tea and noodles are staples consumed daily in China. In contrast, confectionery sales in China spike during Chinese new year and the holiday season, but can be very low for the rest of the year.

Nestle will buy 43.5% of the company from minority shareholders, including large institutional shareholders and another 16.5% from the Hsu family.

Nestle has offered S$4.35 for the shares it is buying in Singapore-listed Hsu Fu Chi. The price represents a premium of 8.7% over the price at which Hsu Fu Chi shares traded on July 1, the last full trading day before trading was suspended pending an announcement. It is a premium of 62% to the one-year volume-weighted average price (VWAP) and 10% to the 30-day VWAP.

The deal has been structured using a scheme of arrangement with the intention that all minority shareholders should be bought out. The Hsu family and its chairman, Hsu Chen, intend to continue to run Hsu Fu Chi. The family will own 40% of the company, assuming all minority shareholders exit.

Schemes are the delisting route used by 90% of takeovers in Singapore, added the source. This approach means that 75% of the shareholders present and voting at the meeting must vote in favour of the scheme. Parties to the scheme are excluded, so in this case the Hsu family, which owns around 56.5% of Hsu Fu Chi, will not be able to vote. Three-quarters of the remaining 43.5% must vote in favour of the scheme. Around 25% of Hsu Fu Chi is owned by Barings, a private equity firm, and Arisaig, an asset manager, who have indicated that they are willing to support the scheme. This suggests the deal will go through at the vote.

One of the attractions for Nestle is the established distribution network of Hsu Fu Chi, added the source. Nestle will try to improve penetration of its own products using this distribution channel.

One lingering question is whether China’s Ministry of Commerce (Mofcom) will approve the deal. Inevitably, the Nestle-Hsu Fu Chi deal is attracting comparison to Coke’s attempted takeover of Huiyuan Juice, which was rejected by Mofcom. However, with a share of less than 10% of China’s confectionery market, the Hsu Fu Chi deal is expected to win regulatory approval.

“This proposed partnership will greatly reinforce our presence in China,” said Bulcke in a written statement. “It combines Hsu Fu Chi’s strong brands, its large portfolio of products at affordable price points, its efficient operations and entrepreneurship with our proven innovation and renovation capabilities, supported by our R&D centres in China. It also demonstrates our long-term commitment to China and enhances our ability to grow our portfolio of international and local brands in this dynamic market.”