Starbucks to buy Teavana for $620 million

Starbucks plans to buy specialty retailer Teavana for $620 million in cash, in a bid to expand its tea business worldwide.

Starbucks already sells tea under its Tazo brand, which generates about $1 billion in annual sales or 8 percent of its overall revenues. Teavana would strengthen Starbucks' tea portfolio, with estimated annual sales of more than $220 million.

'The acquisition of Teavana is in the strength and wheelhouse of our core capability," said Starbucks CEO Howard Schultz. "We will do for tea what we've done for coffee domestically and around the world."

Teavana founder and CEO Andrew Mack and his wife Nancy opened their Atlanta-based tea company in 1997. Since then, they've opened 300 stores in the United States and Mexico, with 30 in California. Teavana's premium teas come in a variety of flavors, including strawberry rose champagne and Wonderberry chocolate truffle.

Teavana went public last year, with its IPO starting at $17 a share. But since then, the price has declined. Prior to the announcement of the acquisition, Teavana shares were selling at around $10.

Teavana struggled as a public company in part because some investors didn't understand the company’s business model, said Nick Setyan, senior analyst with Wedbush Securities.

The store sells teapots and loose leaf teas. Customers pay the most up front when they get a teapot at a Teavana store, but their spending after that decreases because they're buying only tea at the company's stores and website.

When it becomes part of Starbucks, Teavana will be able to experiment more with its products and retail sites without dealing with pressure from investors, Setyan said.

"At Starbucks, because it's such a big company, (Teavana) can do a lot of these things without moving the needle and without being under public scrutiny," Setyan said. 

Mack will continue to lead Teavana's day to day operations after the acquisition. Starbucks said it will keep Teavana's headquarters in Atlanta and the acquisition will not have an impact on jobs.

Starbucks, based in Seattle, will also benefit from the deal. The company has had success selling two different tiers of coffees at grocery stores—Seattle's Best Coffee and the more expensive Starbucks coffee, Setyan said. That might work with Teavana, with Tazo being the lower-priced product.

The retailer is also launching tea-specific stores. On Friday, it will open its first Tazo tea store. The acquisition allows Starbucks to immediately get nearly 300 stores without having to build it out, Setyan said.

"It's a great acquisition for them,” Setyan said. “I think they are uniquely positioned to actually start creating a category, just like they did with the espresso market 20 years ago."

The deal is expected to close by the end of the year. Starbucks stock closed at $48.43, down 41 cents on Thursday. Teavana stock closed at $15.45, down two cents.