Starbucks Corp (SBUX.O) said on Wednesday it plans to buy tea store chain Teavana Holdings Inc TEA.N for $620 million, aiming to replicate the success it has had with its namesake coffee shops.
Teavana has about 300 shopping mall stores that sell loose-leaf, exotic teas. In addition to opening stand-alone Teavana stores in the United States and abroad, Starbucks will add tea bars that serve prepared drinks in existing Teavana stores, Starbucks Chief Executive Howard Schultz told Reuters.
Starbucks opened its first espresso bar inside a store in 1987, when it had 11 stores selling only whole bean coffee.
"We will do something very similar over time with Teavana," said Schultz, who now oversees about 18,000 Starbucks stores around the world. "We will do for tea what we did for coffee."
The deal marks the third complementary acquisition over the past year from Starbucks, which is looking for new avenues of growth beyond its core coffee business.
On a conference call, Schultz called tea "the opportunity of a lifetime".
Teavana Chief Executive Andy Mack is forecasting 500 total Teavana stores by 2015.
The world's largest coffee shop operator will pay $15.50 per share in cash for Teavana, a 54 percent premium to the company's closing price on the New York Stock Exchange on Tuesday.
Shares of Atlanta-based Teavana, which has stores in the United States, Mexico, Canada and Kuwait, jumped 52.5 percent to close at $15.45 on the New York Stock Exchange.
"This could be one of the smartest acquisitions that Starbucks has done yet," said William Blair & Co analyst Sharon Zackfia, who covers both Starbucks and Teavana.
"The valuation was great for this kind of fast-growing retailer," she said, adding that the unit economics at Teavana are "exceptional" and proven across every geography in the United States.
"That's rare for an early-stage retailer" and signals that Teavana is addressing unmet demand, she said.
TWO FOR TEA
This is not Starbucks' first venture into the $40 billion-plus global tea market.
Starbucks bought Tazo tea for $8.1 million in 1999. That business now brings in more than $1 billion in annual sales of products such as tea bags and bottled tea drinks through its own shops and the grocery aisles of many retailers.
On Friday, Starbucks will open its first Tazo tea store in Seattle. That store will act as a "laboratory" for Teavana, Schultz said.
"The two brands will co-exist," Schultz said, who added that Starbucks will develop a line of "super premium" Teavana branded products for retail sale.
The acquisition will take advantage of Starbucks' existing infrastructure and skills, Schultz said.
"There's no incremental expense other than building new stores and new tea bars," said Schultz.
The Teavana deal comes on the heels of the company's acquisitions of juice company Evolution Fresh and La Boulange Bakery. Starbucks bought Evolution Fresh for $30 million in November 2011. It announced the $100 million deal for the bakery in June.
Teavana "is a natural fit with Starbucks' evolving brand portfolio," Morningstar analyst RJ Hottovy said.
News of the Teavana deal was first reported by the Atlanta Business Chronicle. Teavana investors holding about 70 percent of its outstanding shares of common stock have approved the merger agreement, Starbucks and Teavana said in a statement.
Starbucks said it expects the deal to close by the end of the year and to add 1 cent per share in earnings in fiscal 2013.
Shares of Starbucks fell 2.9 percent to $48.84 on Nasdaq.
(This story was fixed to remove incorrect reference to number of new Teavana stores attributed to Starbucks chief executive Schultz in paragraph 6 and add Teavana chief executive Mack forecasts 500 Teavana stores in paragraph 7)