JULY 3, 2011, 4:25 P.M. ET.

Nestlé Holds Talks to Buy Big Chinese Candy Maker

By DANA CIMILLUCA And DEBORAH BALL

Nestlé SA is in talks to buy Chinese candy maker Hsu Fu Chi International Ltd., 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 $2.6 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 $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 white-spirits maker.

Diageo's approval to buy Chinese baijiu brand Shui Jing Fang, announced this past week, could indicate that Chinese authorities are more open to such deals.

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 $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 is 19-year-old company founded by the Hsu brothers who still own a significant stake. The company, which makes chocolate, other candy and the Chinese pastry sachima, had a profit of 602 million yuan ($93 million) on revenue of 4.3 billion yuan in the 12 months ended June 30, 2010. The company's shares are traded in Singapore.

The talks between Nestlé and Hsu Fu were earlier reported by Bloomberg News.

Nestlé, maker of brands such as Nescafe, Häagen-Dazs and Purina, has been looking to increase its sales in the emerging markets from about a third now to nearly half within a decade. It has also been reformulating some traditional products and putting them in lower cost packaging so that it can sell them at lower price points that poorer shoppers can afford. Sales in Nestlé's Asian and African division rose nearly 12% in the first three months of this year, the fastest growth of any region.

The deal would also boost Nestlé's confectionery business, which makes up about 12% of sales, but has been a laggard, particularly compared with rivals such as Cadbury, a division of Kraft Foods Inc. that have large candy businesses in countries such as India and Mexico. In recent years, some analysts wondered whether Nestlé might sell the business, which includes brands such as KitKat and Nestlé Crunch. Instead, it has pushed harder on innovation and raised sales growth. This past week, it launched KitKat in Brazil for the first time.

Write to Dana Cimilluca at dana.cimilluca@wsj.com and Deborah Ball at deborah.ball@wsj.com

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