Starbucks (Nasdaq: SBUX) can now say it's Seattle's Best Coffee. Well, sort of. The java giant announced today that it's purchasing the smaller hometown rival from AFC Enterprises (Nasdaq: AFCE), which also owns Cinnabon, Popeye's Chicken, and Church's Chicken.
Starbucks will pay $72 million in cash for the Seattle Coffee Company, which includes the Torrefazione Italia coffee line in addition to Seattle's Best. Earnings per share for fiscal 2003 are expected to be a cent lower because of the purchase, but Starbucks anticipates the buy adding to its bottom line in 2004.
There are several interesting things about this move. First, Seattle's Best Coffee was founded in (duh) Seattle in 1970, around the same time that Starbucks was. Originally called "The Wet Whisker," Seattle's Best has obviously had a very different 30 years than Starbucks.
The brand reaches more customers through its 12,000 national distribution points (including 5,000 supermarkets) than it does with its 129 North American locations. Starbucks will own all of those locations, plus 21 Torrefazione Italia cafes. AFC will retain the chain's 93 international stores.
Another interesting aspect is that, at least for now, Starbucks says it intends to operate the Seattle's Best and Torrefazione locations under their own brands. That's surprising coming from Starbucks. You'd think they'd just switch them over and be done with it. But perhaps Seattle's love-hate relationship with Starbucks, and fear of a backlash, are reasons why it will just let Seattle's Best be.
Finally, the timing of this acquisition is undoubtedly opportunistic. AFC has been under pressure recently, with the news that it will restate its 2001 and 2002 results and delay filing its 2002 annual report. Shares tumbled 22% the day the story broke, dropping them to a new 52-week low. Though the adjustments will all be non-cash and don't seem to signal fraud of some sort, the market just doesn't tolerate any hint of impropriety anymore.
It's likely that Starbucks saw an easy way in and took it. And who can blame them? AFC needs the cash to pay down its debt, and says this allows it to focus more on its core non-coffee businesses. For Starbucks, it's just another move towards expanding its coffee empire.
LouAnn Lofton owns shares of Starbucks.
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