14 November, 2012 /Woori BMO Group/ Analysts at respected wealth management company Woori BMO Group, have today said that Starbucks is betting that tea will be its next big hit as it continues to move beyond Lattés and Frappuccinos.
“On Wednesday, the coffee colossus agreed to purchase Teavana, the publicly-traded retailer of high-end teas, for $620 million in cash. The acquisition is the largest purchase by Starbucks to date, more than six times larger than its Bay Bread acquisition earlier this year,” said Andrew Williams, Director of Institutional Equity at Woori BMO Group.
“Under the terms of the transaction, Starbucks will pay $15.50 per share, a huge 53 per cent premium on Tuesday’s closing price for Teavana,” he added.
Already it seems that tea, specifically the loose-leaf varieties of Teavana, is the next major area to be conquered. Starbucks forecasts the tea market to be worth around $40 billion, with double-digit growth. It already has a presence in the sector with its brand Tazo at the slightly lower end.
“Starbucks is looking to become involved in the tea business to complement their coffee empire,” said Christian Harper, Director of EMEA Wealth Management at Woori BMO Group.
By capitalizing on Teavana’s extensive distribution channels, Starbucks is looking to expand its newest acquisition. In an interview, Howard Schultz noted that Teavana’s stores generated $3 for every dollar invested in them, and Starbucks has big plans to roll out more stores and tweak the model, including locations. All but one of the 300 stores in Teavana is in malls.
“Our core real estate and design skills are in urban neighbourhoods around the world, and we see plenty of opportunities for Teavana to live in neighbourhoods across the country and beyond,” said Mr. Schultz.
Starbucks is also planning to add tea bars to Teavana stores which currently only sell premium, loose tea bulk. “We will make exceptional blended teas — personalized hot and cold drinks close to the espresso bars we launched in the mid-’80s — and do what we do with coffee with tea,” said Mr. Schultz. He added that Tazo would not be sold in Teavana stores, but could be sold at other retail outlets.
“Starbucks has to deploy a good amount of financial firepower for their acquisitions. As of Sept. 30, the company had $1.2 billion in cash and equivalents on its books, although it also carried about $550 million in long-term debt.”
The investment is backed by Andrew Mack, co-founder, and chief executive of Teavana, and a buyout fund related to the private equity group Apax Partners; together, the two own just over 70 per cent of the company.
The transaction is scheduled to close by the end of the year, awaiting clearance by regulators.
The law firm Cravath, Swaine & Moore represented Starbucks while DLA Piper represented Teavana.