The news: Nestlé SA is in talks to buy Chinese candy maker Hsu Fu Chi International Ltd. (HFCI), according to a person familiar with the matter, in what would be one of the biggest foreign takeovers of a Chinese company. The talks between Nestlé and Hsu Fu are at a delicate stage and still have a number of hurdles to cross, the person said. Any deal for Hsu Fu, which has a market value of S$3.2 billion, is weeks away, the person added.
Many big western companies like Nestlé, the world's largest food company by sales, are scouring developing markets for deals amid sluggish growth at home. But such deals aren't easy to pull off. In 2009, Chinese authorities rejected a US$2.4 billion bid by Coca-Cola Co. to buy all of Chinese soft drinks maker Huiyuan Juice Group Co. It took U.K. liquor giant Diageo PLC 16 months to win Chinese regulatory approval for its bid to take control of a local Sichuan whitespirits maker. But the Hsu Fu deal is a complex one, not least because few takeovers on this scale have ever been pulled off in China. The Diageo deal involves a company valued at less than US$1 billion.
A Nestlé spokesman declined to comment. Hsu Fu officials couldn't be reached after hours at the company's Dongguan headquarters. Hsu Fu Chi has requested for trading suspension of its shares on SGX.
Our thoughts: We believe that the news flow will be positive for SGX-listed consumer players with well-established brand name, which on average trade at 15x FY11F P/E and 2.5x P/B. These beneficiaries would include Conscience Food (BUY, TP S$0.39), Super Group (NEUTRAL, TP S$1.30), and Eu Yan Seng (BUY, TP S$0.99). We have not built in M&A premium in our valuations for these counters. Other counters could include Cerebos Pacific (UNRATED) and Petra Foods (UNRATED).
At its last traded price of S$4.00, HFCI is valued at S$3.2b market capitalisation with projected 21x FY11 and 18x FY12 earnings based on consensus estimates. We do not have a rating on HFCI.
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