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 Coca Cola's
Hsu Fu Chi, which has a market capitalization of about $2.6 billion, said it has engaged in preliminary discussions with Nestle 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 Nestle.
Nestle 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. Nestle stated several times that it intended to increase its exposure in the emerging markets to 45 percent of sales by 2020, Vontobel bank's analyst Jean-Philippe Bertschy said.
Nestle's sales in greater China rose almost 15 percent 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 Wegelin said.
Also, Nestle has been sitting on a pile of cash since it sold its remaining stake in eyecare group Alcon. In April, it said it planned to take a 60 percent 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 percent held by the Hsu family and about 15 percent 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 percent 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 Nestle, 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
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.
Liquidity of the company's stock has been low with traders saying that its valuation is cheap. Nestle's shares rose 0.1 percent at 0918 GMT, underperforming a 0.4 percent higher STOXX Europe 600 food & beverage index <.SX3P>.
(Additional reporting by Eveline Danubrata in Singapore; Editing by Jon Loades-Carter)