What the Starbucks Deal Means for Investors

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Starbucks (Nasdaq: SBUX  ) no longer wants to be synonymous with just coffee. On Wednesday, the java giant announced plans to buy tea retailer Teavana (NYSE: TEA  ) in an all-cash deal valued at $620 million. The acquisition is a win for both Starbucks and Teavana. As growth in Starbucks' core coffee business begins to slow, a greater push into the more than $40 billion global tea segment should help the company lock down market share in this fast-growing category. Despite the obvious positives here, some shareholders are rather dubious about the 54% premium Starbucks paid for the mall-based tea company.

Tea time
On the surface it may seem like Starbucks overpaid in the deal. But Starbucks CEO Howard Schultz is banking on the long-term potential. Just look at what the company has done with its Tazo tea brand. In 1999, Starbucks coughed up $8.1 million to buy Tazo tea. Today, Tazo is a billion-dollar brand under the Starbucks' umbrella.

Similar to what it has done with Tazo, Starbucks plans to leverage its distribution network in order to extend Teavana's reach into the consumer packaged-goods business. More immediately, Starbucks plans to open stand-alone neighborhood stores, as well as add beverage bars to Teavana's existing mall locations.

The 300-store acquisition also opens the door for Starbucks in emerging markets. Teavana is already brewing success in the Middle East, where it is partnered with Alshaya, which happens to also be an international trading partner with Starbucks. The challenge for Starbucks going forward will be balancing its many different business ventures.

A full plate
Starbucks has been acquisition-happy lately. Since last year, the company has expanded into new categories, including the $3.4 billion juice market, single-serve coffee segment, and energy-drink market. Starbucks bought Evolution Fresh, a premium juice brand, for $30 million last November and has since rolled out Evolution Fresh stores in the U.S.

Additionally, Starbucks challenged Green Mountain Coffee Roasters (Nasdaq: GMCR  ) earlier this year when it launched its own single-serve machine known as Verismo. While Green Mountain's Keurig system still dominates the single-serve space, it's only a matter of time until Starbucks gains traction in this category. Starbucks' wild success in new markets boils down to management's exceptional execution skills.

Looking ahead to the Teavana deal, I see nothing but blue skies. The two businesses already complement each other, which should make for a smooth transition. In addition to rewarding its shareholders through dividend payouts, Starbucks is also putting its cash to good use through smart acquisitions. For these reasons I think this stock will be a winner for years to come.

With Green Mountain as cheap as it's ever been, many investors are wondering whether this is the end of the former market darling, or the perfect entry point for an enormous rebound. You can find our recommendation for how to play the company in our new premium research report. In it you'll find everything you need to know about Green Mountain, including whether it's a buy at today's prices. Click here for instant access.

Read/Post Comments (1) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2012, at 6:00 PM, NotJesseL wrote:

    I figured the buyout offer from SBUX put a cap on TEA's potential growth this week and so sold it. Is that a correct analysis?

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2115457, ~/Articles/ArticleHandler.aspx, 10/21/2016 11:23:42 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,080.22 -82.13 -0.45%
S&P 500 2,137.14 -4.20 -0.20%
NASD 5,248.81 6.98 0.13%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 11:07 AM
SBUX $53.42 Down -0.18 -0.33%
Starbucks CAPS Rating: ****
TEA.DL2 $0.00 Down +0.00 +0.00%
Teavana Holdings,… CAPS Rating: *
GMCR.DL $0.00 Down +0.00 +0.00%
Keurig Green Mount… CAPS Rating: **