Nestlé looks for sweet spot in China

Nestle, the world's largest food company, has flexed its muscles in the lucrative Chinese confectionery market by agreeing to acquire a key confectionery maker for $1.7bn (£1.1bn).

The Swiss group is to buy 60 per cent of Hsu Fu Chi, which is listed in Singapore but delivers all its sales in China, where it accounts for about 7 per cent of a $9bn confectionery market.

Nestlé's biggest acquisition so far in the country – whose burgeoning middle class is driving a consumer boom – will help it to hit its target of delivering about 45 per cent of its sales from emerging markets over the next decade.

The Kit Kat and Nescafé giant has offered S$4.35 (£2.23) a share cash to buy 43.5 per cent of the snack maker from independent shareholders. Nestlé then plans to acquire 16.5 per cent of Hsu Fu Chi – which makes sweets, cakes and a leading cereal bar, Sachima – from the four Taiwanese brothers who founded the firm in 1992.

The brothers will retain a 40 per cent stake in Hsu Fu Chi, which had sales of $798m in 2010. Paul Bulcke, Nestlé's chief executive, said the deal "demonstrates our long-term commitment to China", where it has been for 20 years and employs 14,000. It acquired 60 per cent of Yinlu, a Chinese food firm, for an undisclosed sum earlier this year.

While the price paid for Hsu Fu Chi represents a lofty multiple of 15.8 times underlying earnings, Bernstein Research said that strong business in emerging markets, particularly in China, are "always somewhat expensive".