Di-worsification? That Could Be the Starbucks/Teavana Deal

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Starbucks (NASDAQ: SBUX) announced that it will acquire tea retailer Teavana (NYSE: TEA) for $15.50 per share in an all-cash transaction valued at $620 million. The deal is expected to add one cent to Starbucks’ earnings in 2013. Though the deal represented a significant premium to the recent share price, the acquisition price is below Teavana’s IPO price, which will certainly set off some shareholder lawsuits. We’re more interested in the impact it will have on Starbucks.

Unlike the recent lack of innovation we’ve seen at a company such as McDonald’s, Starbucks hasn’t been afraid to make drastic moves to drive store traffic and keep the brand relevant. In addition to adding alcohol to the night menu in certain locations, the company is creating new small plates and other dishes to be sold as afternoon and dinner offerings. CEO and founder Howard Schultz has shown a willingness to do whatever is necessary to keep people in the store at all times. Where does the Teavana deal fit in?

Assuming Teavana is a premium to Tazo Tea, the company hopes to have a two-tiered product structure. We’re interested to see if the company takes existing products and moves them into its current store as ready-to-order concoctions. In its history, Starbucks hasn’t offered much with regards to tea, so this acquisition could foreshadow a menu expansion.

Yet, with the acquisition also comes a large network of retail stores (300) where same-store sales growth has stalled (Q1: 1.7%; Q2: 3.5%) for a “fast-growing” company. Starbucks’ retail expertise could certainly rub off on Teavana, either rebranding the stores as tea cafes or perhaps integrating the Verismo and other Starbucks products into the retail outlet. The company’s strong cash flow from its core businesses will give it plenty of capital to invest in Teavana as Schultz sees fit.

Given the relatively small nature of the deal, we aren’t worried that the company overpaid, nor are we worried that it takes a destructive toll on earnings. Our one fear is that Starbucks is entering empire-building mode, which is incredibly difficult to execute (and often signals reckless risk-taking).

This acquisition will certainly spark rumors that Jamba Juice (NASDAQ: JMBA) or Green Mountain Coffee Roasters (NASDAQ: GMCR) is next on the list, though we don’t think the company would be interested in joining forces with Green Mountain when it can simply crush them. Even though the firm's latest quarter was slightly better than anticipated, we do not like the long-term odds of the Vue versus the Verismo--it hasn't even been able to eclipse the Keurig in terms of sales. A Jamba acquisition isn’t completely far-fetched because Starbucks could integrate its products through Starbucks stores and further the brand’s monetization in the ready-to-drink category. But, these acquisitions can add up and “synergies” aren’t always as accretive as planned.

Ultimately, the deal doesn’t impact our fair value for Starbucks, though it does reveal that Starbucks is in search of new growth avenues, in our view. Shares remain fairly valued, though we at Valuentum continue to love the company’s brand power and execution excellence since Schultz returned to the CEO role.

Valuentum has no positions in the stocks mentioned above. The Motley Fool owns shares of Green Mountain Coffee Roasters, Starbucks, and Teavana Holdings and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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