China's Ministry of Commerce approved Nestle SA's $1.7 billion purchase of a 60% stake in Hsu Fu Chi International Ltd, a leading Chinese candy maker, clearing the way for what will be one of the largest foreign takeovers of a Chinese firm.

The offer was proposed in July and later went to the Ministry of Commerce for antitrust review.

The Hsu family, who founded the candy maker, will continue to the own the remaining 40%, according to a Hsu Fu Chi filing to the Singapore Stock Exchange.

This transaction is another sign that China is open to foreign capital. Yum! Brands Inc (NYSE: YUM) was given the green light in early November to spend $587 million taking over Little Sheep Group Ltd (HKG: 0968), China's largest hotpot restaurant chain, after four months of antimonopoly review.

Nestle's Hsu Fu Chi deal will reshuffle China's confectionery market and make it a monopolistic industry, experts say. It will also better position Nestle in a rapidly growing Chinese market by tapping directly into new distribution channels and local tastes.

Hsu Fu Chi principally produces candies and packaged cakes, the sales of which will supplement Nestle's instant coffee, bottled water and milk powder businesses in China. Hsu Fu Chi posted ¥4.3 billion in revenues and ¥602 million in net profits for the first half of 2010. It has four plants in China and employs 16,000 people.

"Hsu Fu Chi's distribution channels are the most precious assets for Nestle, which lags far behind Kraft and Unilever in China," said Zhu Danpeng, an analyst with the China Food Industry Research Institute. "By purchasing Hsu Fu Chi that captures the lion's share of China's confectionery market, Nestle will gain almost 18,000 retail counters from Hsu Fu Chi, which, in return, will have access to Nestle's influence, capital, technology and managerial know-how."

Given similar brand image and R&D capability, distribution channel defines who will win, Zhu argued. "Nestle's products will quickly trickle down to second- and third-tier cities and China's confectionery market is braced for a revolution in three years," Zhu added.

$1 = ¥6.33


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