Starbucks acquires Teavana Holdings

January 2013 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

The diversification of Starbucks Corporation’s business continued unabashed in November when the company announced it intends to purchase Teavana Holdings Inc for $620m. The deal will see Starbucks pay $15.50 per share for the chain of high-end tea stores.

Currently, Teavana has 300 stores located primarily in shopping malls across the US, Canada and Mexico. The company also recently opened an outlet in Kuwait. Starbucks’ chief executive officer Howard Schultz told Reuters that the company intends to build upon this foundation by opening a number of new standalone stores, as well as modifying existing retail stores to accommodate small, bespoke tea bars selling prepared, speciality beverages. Teavana’s chief executive Andy Mack has predicted there will be around 500 Teavana stores by 2015.

The purchase of publicly-traded Teavana represents Starbucks’ second foray into the $40bn-plus tea market following its purchase of Tazo tea in 1999. Though the purchase price of Tazo, at $8.1m, was nowhere near as significant as the company’s outlay for Teavana, Starbucks intends to use Tazo as a template for the future success of its latest brand. Indeed, Tazo generates around $1.4bn annually in sales of teas and bottled beverages in retail stores and Starbucks’ own coffee shops.

In November Starbucks opened its first – and possibly only – Tazo tea store in Seattle. The store, Mr Schultz noted, will serve as a “learning laboratory” for Teavana and the future expansion of the brand. Although it is still unclear whether Starbucks intends to carry both tea brands in its own retail locations, the company does plan on making packaged Teavana products available in supermarkets and grocery stores. Schultz also added that the Teavana deal represented “the opportunity of a lifetime”.

Mr Schultz, noting the way in which Starbucks has grown its own business, said “we will do something very similar over time with Teavana... [we] will do for tea what we did for coffee”. Indeed, in 1987 Starbucks opened its first espresso bar in one of its 11 retail locations. Today the company has around 18,000 stores worldwide.

Since Schultz returned to the role of chief executive in 2008 Starbucks has embarked upon an ambitious diversification program. In 2011 the company removed the word ‘coffee’ from its branding; it also acquired Evolution Fresh Inc for $30m. Bay Bread LLC was incorporated into the Starbucks portfolio in 2012 in a deal worth $100m.

The acquisition of Teavana will help strengthen Starbucks’ position, most notably in China. The burgeoning Chinese middle class represents an excellent opportunity for growth for the company. China is currently the number one nation worldwide for tea consumption. Indeed, tea consumption outstrips coffee by 16 times. Though Starbucks is slowing down its expansion in some regions, and even closing some stores in the UK, it plans to double its foothold in China to 1000 locations by the end of 2013.

Teavana, founded in 1997, has shown excellent levels of growth over the last few years, at one point trading 24.7 times above its EBITDA. The company reported $168m in revenue last year, as well as $189m in sales over the last four quarters. When the acquisition was announced, the purchase price valued Teavana at approximately 17.5 times its EBITDA.

Sharon Zackfia, an analyst at William Blair & Co, feels that “this could be one of the smartest acquisitions that Starbucks has done yet. The valuation was great for this kind of fast-growing retailer.” Before the deal can be completed, however, there are a number of issues to be resolved. On 26 November the Shareholders Foundation Inc announced that a Teavana shareholder had filed a lawsuit hoping to block Starbucks’ acquisition of the company. The plaintiff claimed that the offer of $15.50 per share is unfair to stockholders and undervalues Teavana. In February and May 2012 the company’s shares sold for $24.70 and $21.47 respectively.

On 20 November, a short seller of Teavana’s – Glaucus Research Group – reported that it had found pesticides in Teavana’s tea – a claim refuted by the company. Glaucus suggested that Starbucks should walk away from the deal, noting that its findings would violate laws related to deceptive marketing. Shares in Teavana fell 5.2 percent following Glaucus’ announcement.

Richard Summerfield