After being in negotiations for two years, Swiss giant Nestlé, the world's largest food company, announced on July 15, 2011, that it had reached an agreement to pay $1.7 billion for a 60% interest in candy maker Hsu Fu Chi International. The remainder of the firm would be owned by the founding Hsu family. This transaction constituted the biggest deal yet for Nestlé in China and one of the biggest in China by a foreign firm. The deal represents Nestlé's second major purchase in China in 2011, after the firm agreed to buy 60% of the Yinlu Foods Group in April. The agreement called for Nestlé initially to buy 43.5% of the firm's shares from independent shareholders (i.e., non-founding family and non-institutional investors) for 4.35 Singapore dollars (equivalent to $3.56 per share), a 24.7 % premium over the six months ending on July 1, 2011, and a 16.5% stake from the Hsu family. Hsu Fu Chi's current CEO and chairman, Mr. Hsu Chen, would continue to manage the fi rm. Nestlé paid
3.3 times revenue, as compared to 2.4 times what U.S. food manufacturer Kraft Foods paid for British candy company Cadbury in 2010. However, the deal was less expensive than Mars' takeover of Wrigley at 4.2 times sales in 2008 and Danone's purchase of Dutch rival Numico for 4.5 times sales in 2007. Nestlé justified the multiple of revenue it paid by noting that the investment in Hsu Fu Chi provides an opportunity to become the top player in this high-growth market. In addition, Hsu Fu Chi provides a platform for future acquisitions that could in concept be relatively easily added to its Chinese confectionary operations.

Despite having had a presence in China for more than 20 years, Nestlé has found it difficult to grow its distribution system organically (i.e., by reinvesting in its existing operations).
As of 2010, Nestlé operated 23 plants and two research centers with more than 14,000 employees in the country, with annual sales of $3.3 billion. Nestlé's existing product portfolio in China at that time included culinary products, instant coffee, bottled water, milk powder, and other products for the food service industry. With the addition of Hsu Fu Chi, Nestlé's sales in China jumped to $4.2 billion. Nevertheless, its market share in the
food business still lagged that of rivals Unilever and Danone. With its revenues in China growing at 8% to 10% annually, Nestlé has stated publicly that it intends to derive at least 45% of its total annual revenue from emerging countries by the end of the decade, as compared to about one-third in 2010.

Founded in 1992, Hsu Fu Chi has four factories and 16,000 employees in China and is the leading manufacturer and distributor of confectionery products in China. With an estimated
6.6% market share and annual sales of $800 million, the firm makes chocolate, candies, and pastries popular in China and had annual sales of $800 million at the time of the transaction.
Profits rose 31% in 2010 to $93 million. Located in the southern Chinese city of Dongguan, the firm operates an extensive distribution network and has numerous retail outlets, which should facilitate the distribution and sale of Nestlé products in China. Hsu Fu's annual revenue is growing three times faster than Nestlé's global annual sales. The firm's direct distribution network forms a large barrier to entry for competitors.

With Hsu Fu Chi listed on the Singapore stock exchange, the deal helped unlock value for Hsu Fu Chi's independent shareholders. As with many Singapore-listed Chinese firms,
Hsu Fu Chi's independent shareholders had seen little appreciation of their holdings in recent years and had found it difficult to sell their shares, given the limited daily trading volume
in the market for the firm's shares. Daily trading volume in the shares averaged about 0.1% of the firm's market cap. Despite having similar profit margins, Hsu Fu Chi traded at a ratio
of 22 times trailing earnings, compared with 28 for comparable firms.

With the founding family owing 57% of the shares and Baring Private Equity Asia owning 15%, there were few independent shareholders to whom to sell shares. As the controlling
shareholder, the founding family had little incentive to buy out the minority shareholders except at a significant discount from what investors believe is the firm's true value in order to take the firm private by buying out the public shareholders. Consequently, the independent shareholders had ample reason to support the Nestlé proposal. Hsu Fu Chi, which currently generates all of its revenue in China, may need Nestlé to expand overseas. The firm has stated that it wants to enter the international market, but it may not have the requisite resources to do so. Nestlé's strong international network and name recognition may make such expansion possible.

Discussion Questions
1. What were Nestlé's motives for acquiring Hsu Fu Chi? What were the firm's alternatives to acquisition, and why do you believe they may not have been pursued?

2. What alternatives did the majority shareholders in Hsu Fu Chi have for growing the firm? Speculate as to why they may have chosen to sell a controlling interest to Nestlé?

3. Speculate as to why Nestlé used cash rather than its stock to acquire its ownership interest in Hsu Fu Chi.

4. Why do you believe the independent and non-institutional shareholders in Hsu Fu Chi, whose shares were listed on the Singapore stock exchange, were willing to sell to Nestlé? What were their other options?

5. Nestlé is assuming that it will be able to grow its share of the Chinese confectionary market by a combination of expanding its existing Chinese operations (so-called organic growth) and acquiring regional candy and food
manufacturers. What obstacles do you believe Nestlé could encounter in its efforts to expand in China?

6. Do you believe that multiples of revenue paid by other food companies is a good means of determining the true value of Hsu Fu Chi? Why? Why not?

7. Despite having similar profit margins, Hsu Fu Chi traded at a ratio of 22 times trailing earnings, compared with 28 for comparable firms. Why do you believe Hsu Fu Chi's share price on the Singapore stock market sold at a 21% discount
from the share price of other firms?