China Law Vision : China Insurance & Anti-Trust Lawyer : Dr. Zhan Hao : Grandall Legal Group : Anti-Monopoly & Competition Law : China Law Vision Blog

Without many disputes, Nestlé’s market share in Chinese confectionary market would be much higher ex post this transaction. According to the market sources, Hsu Fu Chi’s greatest strength lies in bulk sales, while Nestlé is good at package sales. It is highly anticipated that combination of Nestlé and Hsu Fu Chi would give rise to a synergy effect, hence would influence Chinese confectionary market in a significant degree.

A spokesman from Nestlé publicly expressed there would not be major changes on the company’s development direction and employee after the concentration. Nevertheless, when asked if Hsu Fu Chi has the plan to develop high-end product after Nestlé joins in, he said, there existed various possibility.

Founded in 1866 by Henri Nestlé in Vevey, Switzerland, Nestlé is the world's leading Nutrition, Health and Wellness company. Nestlé’s product lineup covers from baby food, bottled water, cereals, chocolate & confectionery, coffee, culinary, chilled & frozen food, dairy, drinks to food service, healthcare nutrition, ice cream, petcare, sport nutrition, and further to weight management.

Hsu Fu Chi is China’s largest listed confectionery company, with more than 16,000 sales outlets and 100 sales affiliates. In connection to its revenue, the first quarter of 2011 alone was Rmb1.51bn ($234m). Hsu Fu Chi focuses itself on chocolates, pastries and other sweets markets, and particularly is famous for a breakfast bar called Sachima. It should be recognized that Hsu Fu Chi already developed into a national brand within two decades. Voices from different communities, hence, expressed their worry that this event may ignite nationalist outcries just as it did with Coca-Cola's negotiations with Huiyuan.

From a legal point and preliminary view, this concentration may bring about many anticompetitive effects. Firstly, both Nestlé and Hsu Fu Chi are strong market players in Chinese market with regard to their own products, respectively. (Without exact and concrete market share statistics though). Secondly, there is horizontal overlap between the two “Mr big”, namely, on the product market of confectionery. In a further consideration, the occurrence of penetrating effects between different markets of Nestlé and Hsu Fu Chi cannot be excluded from concerns in any means. Therefore, Nestlé’s action also triggered a school of worries that it may encounter the same judgment as Coca-Cola (KO) and juice maker China Huiyuan Juice Group in 2009.

As far as the author concerned, nevertheless, Hsu Fu Chi harbors still the hope of being cleared given that the following grounds:

Firstly, Hsu Fu Chi has not such a powerful market position as Coca cola has in consideration of the situation of confectionary market. (6.6% in 2009) Besides, it has been seen that the trend of mergers and acquisitions in China's confectionery industry recent years has facilitated cooperation in many creative levels, and accordingly inflamed more fierce competition and more pressure on local players. Consequently, concerned acquisition here also give rise to many precompetitive effects on the relevant market.

All in all, how the Ministry assess and balance the concentration at issue is still of full suspicion.

Nestlé plans to purchase a 43.5% stake in Hsu Fu Chi from the two shareholders that are not part of the Hsu family. If these shareholders agree with the stock purchase plan, Nestlé will buy a further 16.5% share from the 56.5% share held by the Hsu family. In 2010, Nestlé's sales in China rose by 15% - the most rapid rate of growth of all of its sales regions. However, the company still lags far behind rivals such as Kraft General Foods and Unilever. For Nestlé, purchasing a famous quality brand is the best way to catch up.

Pursuant to the Provisions of the State Council on Thresholds for Prior Notification of Concentrations of Undertakings, the undertakings concerned must file a prior notification with the relevant commerce department of the State Council if:

"the combined worldwide turnover of all undertakings concerned in the preceding financial year was more than Rmb10 billion, and the nationwide turnover within China of each of at least two of the undertakings in the preceding financial year was more than Rmb400 million."

A spokesperson for the Ministry of Commerce announced at a press conference that on the basis of the information held by the ministry, the turnover figures of both parties reach the relevant thresholds.

The acquisition could significantly change the composition of the Chinese confectionery market. Nestlé is the fifth biggest manufacturer in China's domestic confectionery market(See 21st Century Business Herald); Hsu Fu Chi, with a market share of more than 7%, is in second place. If its plan succeeds, Nestlé will become the market leader. The potential impact of the deal makes it sensitive. It is too early to predict whether the ministry will approve the acquisition, with or without conditions.

Documents and materials have been submitted to the ministry and will be officially filed once the ministry is satisfied with the sufficiency of the documents and materials.