UPDATE 2-Starbucks and Peet's in recent deal talks-report

Tue Mar 15, 2011 5:58pm EDT

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NEW YORK, March 15 (Reuters) - Peet's Coffee & Tea Inc PEET.O recently held talks with Starbucks Corp (SBUX.O) about a potential sale to the large coffee shop chain, CNBC reported, citing a DealReporter report.

Peet's has a market value of $589 million based on the stock's closing price of $46 on Tuesday, when it rose 9.4 percent. Starbucks is valued at over $26 billion.

The DealReporter did not say how likely a deal was between the two, CNBC said.

Both Peet's Chief Executive Patrick O'Dea and a Starbucks spokesman declined to comment. Rumors about a tie-up between the two companies, which have historical ties, have been floating around the market for months.

"It's not about the coffee shops. It's about growing the grocery business. That's where (a possible merger) has a lot of synergies" Stifel Nicolaus analyst Steve West said.

"What can Starbucks do with Peet's business in the next 2 to 3 years? They can probably double or triple it," West added.

Peet's currently trades at about 29.3 times current 2011 analysts' average EPS estimate.

The Emeryville, California-based coffee company sells packaged coffee through retailers like Safeway Inc (SWY.N) and Kroger Co (KR.N) It also operated 192 retail stores in six states as of Jan. 3.

Starbucks last week announced a deal in which Green Mountain Coffee Roasters Inc (GMCR.O) would sell Starbucks coffee for its Keurig single-cup machines, and Starbucks would sell the Keurig machines. [ID:nN09293414]

Their agreement was seen as a formidable challenge to Peet's and its shares fell after the deal was announced.

Peet's, which boasts of a loyal following of coffee drinkers called 'Peetniks,' has said it wants to get into the fast-growing single-cup coffee market. It lost a takeover battle with Green Mountain in early 2010 for Diedrich Coffee -- which makes coffee for Green Mountain's Keurig machines. (Reporting by Mihir Dalal in Bangalore, Phil Wahba in New York and Lisa Baertlein in Chicago; Editing by Richard Chang, Bernard Orr)

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