Should Starbucks buy Peet's Coffee?

Shares of Peet's bounce on rumors of a Starbucks buyout. But should the coffee giant try to acquire its cappuccino-size competitor?

By TheStreet Staff Mar 16, 2011 10:31AM

File photo of Starbucks barista (© Anthony Bolante/Reuters)By Miriam Reimer, TheStreet

 

Updated at 2:58 p.m. ET

 

Peet's Coffee & Tea (PEET) shares plunged last week after Starbucks (SBUX) and Green Mountain Coffee Roasters (GMCR) announced a long-anticipated partnership. But the coffee roaster and specialty retailer's stock has soared amid rumors that Starbucks could be looking to take it over.

 

Peet's shares surged 9.4% Tuesday and continued to climb 2.2% Wednesday, to $47.03, amid rumors it could be a takeover target of Starbucks. The stock had plunged 11.4% Thursday, the day Starbucks and Green Mountain announced a deal in which Starbucks and Tazo tea-branded K-Cup portion packs will be available for Green Mountain's popular Keurig single-cup brewing systems later this year. Investors were clearly disappointed that Emeryville, Calif., Peet's had been left out of the lucrative partnership.

 

Starbucks hinted last month that such a partnership was in the works when it told news outlets in February it had plans to announce a new product for the single-serve coffee market "in the near future." The Seattle coffee chain did announce a distribution agreement with Courtesy Products, a privately held provider of in-room coffee service to hotels across the U.S.

 

Starbucks already sells individual instant coffee packets under its Via brand, but speculation among analysts had been mounting that Starbucks was poised to push more aggressively into the single-cup brewing market now dominated by Green Mountain's Keurig machines and K-Cup portion packs.

Analysts from Credit Suisse estimate that the Green Mountain deal will add 15 cents per share to Starbucks' earnings in fiscal 2012, and 23 cents per share in fiscal 2013. The partnership also adds weight to Green Mountain's Keurig platform, already the leader in the at-home and in-the-office single-cup brewing market.

 

Canaccord Genuity consumer analyst Scott Van Winkle noted that the Starbucks-Green Mountain deal lessens the risks of K-Cup competition. "The deal's impact on (Green Mountain) shares is rightfully more than the impact on near-term earnings or cash flow," Van Winkle added. "We believe that the Starbucks partnership reduces risk by at least 20% and thus have increased our near-term price-to-earnings target by 20%."

 

Maxwell House coffee is owned by Kraft Foods (KFT). Until recently, Starbucks had been providing coffee discs for Kraft's Tassimo single-cup home brewers. That agreement officially ended March 1 after a drawn out, public legal battle between the pair in which Starbucks claimed that Kraft neglected and mismanaged the partnership.

 

Despite Tassimo's success with some consumers, Green Mountain's Keurig brewing system enjoys market share of around 80%, according to Reuters, dominating other competitors as well, including Sara Lee's (SLE) Senseo brewer and Nestle SA's (NSRGY) Nespresso system.

 

Earlier this year Starbucks unveiled a new, wordless logo. At the time, CEO Howard Schultz said that the wordless logo, in part, "gives us the freedom and flexibility to think beyond coffee."

 

The new logo, officially launched this month, also represented Starbucks expansion plans, and the rumors circulating about a Peet's takeover could very well be the latest round of the Seattle coffee shop chain's growing global footprint.

 

With all this in mind, what do you think? Should Starbucks be angling to acquire Peet's Coffee? Take our poll here, and see what readers of TheStreet think.

 

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