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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.
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.