Starbucks seeks profit infusion with Teavana buy

With its third big acquisition in a year, the coffee giant is implementing an IBM-like blueprint for growth.

By TheStreet Staff Nov 15, 2012 1:58PM

A Starbucks Corp., sign is displayed outside a coffee shop in London, U.K. , Chris Ratcliffe, Bloomberg via Getty ImagesTheStreet logoBy Antoine Gara

 

Continuing an expansion of its in-store food and drinks offerings, Starbucks (SBUX) is buying Teavana (TEA), a tea-inspired drinks chain, for $15.50 a share, in an all-cash deal that values the company at $620 million.


The move follows Starbucks' previous acquisitions of Evolution Fresh, a fruit juices specialist, and La Boulange, a bakery chain -- and further proves chief executive Howard Schultz's commitment to grow the world's leading coffee chain through a mix of new store openings, product launches and acquisitions.

 

This is Starbucks third  acquisitions as part of its "Blueprint for Growth," a strategy that resembles the one employed by IT services giant IBM (IBM), as TheStreet noted.

 

Heading into 2013, CEO Schultz will now need to prove he can deliver on IBM-like profit growth, as Teavana and other recent acquisitions take center stage in the earnings outlook for the Seattle company. Recent earnings strength signals Starbucks is finding increasing success in growing profit margins.

 

Starbucks will also need to jolt growth at Teavana, as the company's same-store sales growth has slowed in recent quarters, putting shares well below their Aug. 2011 initial public offering price.

 

As with previous acquisitions, Starbucks indicated it intends to weave Teavana's products and merchandising into its existing stores, while also expanding the tea-makers branded retail outlets. 


Schultz believes Teavana will be a strong complement to its other tea line. "This complements our existing Tazo brand and gives us the unique opportunity to create a two-tiered market position," Schultz said, in a statement announcing the deal.

 

"Powered by Starbucks existing infrastructure, Starbucks plans to continue to grow and extend Teavana's already-successful 300 mall-based stores as well as add a high-profile neighborhood store concept that will accelerate Teavana's domestic and global footprint," the company added in a press release.

 

Teavana is expected to add 1 cent to Starbuck's fiscal 2013 earnings. Roughly 70% of Teavana's shareholders have approved the merger "by written consent," notes Starbucks of the deal, which it expects to close by year-end.

 

After the news Wednesday, Starbucks shares fell nearly 3% to $48.84, while Teavana's shares surged over 50% to $15.45, just below Starbucks cash offer.

 

In spite of Wednesday stock gains, Teavana shares are off nearly 20% in 2012, while Starbucks stock has gained over 6%.

 

As with the acquisitions of Evolution Fresh and La Boulange, Starbucks president Jeff Hansberry said Teavana is expected to help the coffee giant add to a growth strategy centered on bringing added products to its stores, while targeting new avenues for distributing of the company's products in supermarkets and large retail outlets.

 

"Evolution Fresh, La Boulange and now Teavana demonstrate how Starbucks will add brands that strengthen our core offering and create a rich ecosystem of experiences with shared values, mutual efficiencies and complementary characteristics," said Hansberry, in a statement.

 

Earlier in November, TheStreet reported that investors should focus on Starbucks' growth prospects, even after the retailer reported surprisingly strong third-quarter earnings and an unexpectedly large increase in its quarterly dividend.

 

The recent acquisitions will play a front and center role as CEO Howard Schultz hopes to prove to skeptical investors that he's uncovered a predictable way to grow profits, after previous efforts at store expansion backfired and led to his departure from the company roughly a decade ago.

 

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