Friday, July 22, 2011

Nestlé's loss Hsu Fu Chi's gain

A fund advised by Baring Private Equity Asia (BPEA) stands to make a substantial gain on its investment in Chinese confectionary company Hsu Fu Chi after Nestle tabled an offer of $1.7 billion for a 60% stake in the company. The size of the deal, which values the Chinese firm at $2.8 billion, is further proof that Nestle is committed to its goal of deriving 45% of sales from emerging markets in the next 10 years.
Hsu Fu Chi is best known for its Sachima breakfast bar and Chinese New Year candies, but also manufactures a range of candy, cereal-based snacks, cakes and traditional Chinese snacks. The company operates four factories and employs 16,000 people, but Nestle is probably most interested in its 17,000-plus sales outlets and 120-plus sales offices. This would allow the foreign company to substantially increase its China footprint.
Under the proposed deal, Nestle would buy a 43.53% stake held by a collection of shareholders, including Baring Private Equity and Arisaig Partners, at S$4.35 per share, an 8.7% premium over the July 1 closing price. It would then purchase a 16.48% interest owned by the Hsu family for the same price, leaving the family with a 40% stake. The company would be de-listed from the Singapore Stock Exchange and operate as a joint venture.
The agreement would still require approval from China’s Ministry of Commerce as well as Cayman Island courts, where Hsu Fu Chi is incorporated, and company shareholders. A Hsu Fu Chi spokeswoman said that, even if the shareholders agree to a delisting, the plan would fall through without support from Chinese regulators.
“Nestle’s transaction represents an excellent opportunity for Hsu Fu Chi’s shareholders to realize the full value of their investment,” Jean Eric Salata, Baring’s founding chairman and CEO, told AVCJ. He added that Baring, which has enjoyed a strong relationship with Hsu Fu Chi since its investment two years ago, fully supports the Nestle transaction.
Baring originally invested in the company in late 2009, taking an approximate 16.5% shareholding. Gordon Shaw, managing director of Baring’s Shanghai office, told AVCJ last year that the private equity firm “took advantage of the relatively lower price-to-earnings multiples found in Singapore.” He added that Baring would help Hsu Fu Chi to realize its full value by assisting in HR and strategic planning.
According to the joint venture proposal, the private equity firm’s financial interest in the company is unchanged. It currently holds 13.3 million shares through Winmoore Holdings and a further 117.7 million through Star Candy, putting its cumulative stake at 16.49%. Based on a purchase price of S$4.35, it can expect to receive $464.2 million from Nestle.
Arisaig Asia owns 71.1 million shares, which translates into an 8.95% stake. The private equity firm is therefore on course to  exit with $251.9 million.

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