By Leslie Hook in Beijing

Nestl?, the Swiss food group, is set to acquire Hsu Fu Chi, the Chinese sweets company, for S$2.1bn (US$1.7bn) in a deal that marks one of the largest foreign acquisitions in China and underscores the race for the country?s food sector.

The Swiss group plans to purchase 60 per cent of Singapore-listed Hsu Fu Chi, with the remaining 40 per cent to be owned by four Taiwanese brothers who founded the company. If the deal is approved by regulators and shareholders, the stock will be delisted, with Nestl? and the Hsu brothers operating the company as a joint venture.

China?s food market is becoming a hot target for foreign investment, as rising incomes feed a growing appetite for packaged foods. China?s confectionery market alone is worth more than $9bn a year, according to Euromonitor.

Hsu Fu Chi, which had sales of $798m last year, makes sweets, cakes and a popular cereal bar called Sachima. All the company?s sales are in China.

?There is more disposable income to go around in China today and people have less free time … that?s leading to growing demand for packaged foods like cakes and cookies and crackers,? said Ben Cavender, analyst at China Market Research, a Shanghai-based consultancy.

He said anti-monopoly hurdles were unlikely to pose a major challenge to the deal, as Hsu Fu Chi holds just a 6-7 per cent market share in China?s confectionery market.

Nestle?s announcement follows Diageo?s acquisition of a stake in Chinese liquor brand Shui Jing Fang, which was approved by China?s regulators in June, an encouraging sign for foreign investment in the food sector. ?[This proposed partnership] combines Hsu Fu Chi?s strong brands, its large portfolio of products at affordable price points, its efficient operations and entrepreneurship with our proved innovation and renovation capabilities, supported by our R&D Centres in China,? said Paul Bulcke, Nestl? chief executive.

Nestl??s milk sales soared following the melamine milk powder scare that turned consumers away from Chinese milk brands.

Nestl? sells a range of foods in China and reported sales of SFr2.8bn ($3.3bn) for the China region last year. Under the proposed deal, Nestl? will buy 43.5 per cent of the company from shareholders and then buy a 16.5 per cent stake in the company from the brothers who currently control a majority stake. Nestl? is offering S$4.35 per share, and Hsu Fu Chi stock rose to that level when trading resumed on Monday. The price is a 9 per cent premium to the closing price on July 1, when Hsu Fu Chi stock was suspended, and a 25 per cent premium to the 180-day weighted average stock price.

Nestl? struck a similar deal with Yinlu, a family-run food company in which it bought a 60 per cent stake, underlining the Swiss group?s determination to expand into fast-growing emerging markets.

The discussions with Hsu Fu Chi lasted for about a year and the family will continue to run the company after the transaction is completed, said a person close to the deal.

Both companies declined to provide a time frame for when the deal might receive regulatory approval. Nestl? was advised by Credit Suisse on the deal.

Additional reporting by Anousha Sakoui in London

? The Financial Times Limited 2011