Nestlé SA , the world's largest food company, is among companies in talks with Chinese candies and pastries group Hsu Fu Chi International on a deal that could be worth over $2-billion (U.S.).
Analysts said it would make sense for Nestle to buy a company in an emerging market due to sluggish sales at home.
However, acquisition deals in China are often tough to complete because they are subject to approvals from Chinese authorities, which have rejected deals before. One such rejected deal was the 2009 Coca Cola bid for juice maker China Huiyuan.
Hsu Fu Chi, which has a market capitalization of about $2.6-billion, said it has engaged in preliminary discussions with Nestlé for a possible deal that may or may not lead to an offer being made for the shares of the company.
"We won't deny they are one of the companies that we've been in touch with, but they are not the only one," Hsu Fu Chi spokeswoman, Christine Sun, said by telephone, referring to Nestlé.
Nestlé spokeswoman Nina Backes declined to give further details on the nature of the talks.
"We believe that the deal with Hsu Fu Chi would make sense. Nestlé stated several times that it intended to increase its exposure in the emerging markets to 45 per cent of sales by 2020," Vontobel bank's analyst Jean-Philippe Bertschy said.
Nestlé's sales in greater China rose almost 15 per cent in local currencies to 2.8-billion Swiss francs in 2010, making it the Swiss-based company's fastest-growing region.
The strong Swiss franc, which has recently risen to record highs against the euro and the dollar, will make acquisitions abroad cheaper, Swiss private bank Mr. Wegelin said.
Also, Nestlé has been sitting on a pile of cash since it sold its remaining stake in eye care group Alcon. In April, it said it planned to take a 60 per cent stake in China's Yinlu Foods Group for an undisclosed price.
Hsu Fu Chi, which is based in Dongguan in China's southern Guangdong province and makes Chinese snacks such as peanut candies, pop jellies and sachima rice snacks, is over 50 per cent held by the Hsu family and about 15 per cent held by Baring Private Equity.
"If the company has the blessings of the family, the deal could go through," said Tan Han Meng, an analyst at Singapore brokerage DMG & Partners.
"It (Hsu Fu Chi) offers about 6 per cent exposure to the China candy market and the company has very good cash flows. It's one of the success stories from a young fast-growing company to one that has stabilized and has become a cash cow."
While the deal may look attractive for Nestlé, it won't be an easy process to wrap it up.
Coca Cola lost the Huiyuan bid, while it took more than a year before Britain's Diageo PLC won Chinese approval to raise its stake in the biggest shareholder of Chinese white spirits group Sichuan Shuijingfang
Shares of Hsu Fu Chi, which has a market capitalization of $2.6-billion, were suspended on Monday. Sun said there was no immediate timeframe as to when trade would resume.