By Saeed Azhar and Lee Chyen Yee
SINGAPORE/HONG KONG (Reuters) - Nestle <NESN.VX>, the world's largest food company, offered to buy 60 percent of Chinese candies and pastries group Hsu Fu Chi International <HSFU.SI> for about $1.7 billion to expand in one of the world's biggest consumer markets.
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The Hsu family, which owns 56.48 percent of the Singapore-listed company, will sell a 16.48 percent stake to Nestle, but the family will retain 40 percent in the firm under a joint venture deal, Hsu Fu Chi said in a statement.
The deal comes at a time when a series of accounting scandals at foreign-listed Chinese companies has triggered a widespread sell-off in China-based stocks and is prompting owners to consider mergers or partnerships.
"The investment is good for Nestle as Hsu Fu Chi has a very good distribution network in China and a decent brand profile, with 6 percent of the market share in China's candy market," said Tan Han Meng, an analyst at DMG & Partners.
Shares of Chinese companies listed in Singapore, known as S-chips, trade at a discount to their Singapore counterparts, which is forcing controlling shareholders to seek exits, he said.
"We've seen fair amount of delisting, with shareholders taking the companies private. At this time S-chips as a whole have been affected by the negative sentiment from recent scandals," Tan said.
"For investors looking at the long term, some of them may look deeper into companies that have been unfairly punished to find valuable gems."
The agreement would still require approval from China's commerce ministry, Cayman Island courts, where the company is incorporated, and shareholders, Hsu Fu Chi spokeswoman Christine Sun said from Dongguan in China's southern Guangdong province.
Nestle will also buy 43.52 percent from shareholders such as Baring Private Equity and asset manager Arisaig and together with the Hsu family will seek to delist the firm.
The deal, which values Hsu Fu Chi at S$3.46 billion, comes a few weeks after British drinks group Diageo <DGE.L> won approval to raise its stake in Sichuan Shuijingfang <600779.SS>, China's fourth largest white spirits group.
The Diageo deal raised hopes that foreign bids for well-known Chinese brands are possible, which had became a concern two years ago when Chinese regulators blocked Coca-Cola's <KO.N> $2.4 billion bid for the country's top juice maker, Huiyuan Juice <1886.HK>.
Nestle has no intention to make major changes to the business or cut jobs, Hsu Fu Chi said.
Dongguan-based Hsu Fu Chi makes snacks such as peanut candies, pop jellies and sachima rice snacks.
The company's shares were up 9.8 percent on Monday after a trading halt, which was in place since July 1, was lifted.
Analysts have said in the past it would make sense for Nestle to buy a company in an emerging market due to sluggish sales at home.
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.
Credit Suisse <CSGN.VX> advised Nestle. The directors of the Singapore-listed company plan to appoint an independent financial adviser.
($1 = 1.221 Singapore Dollars)
(Additional reporting by Charmian Kok and Rachel Armstrong; Editing by Vinu Pilakkott)