Teavana Is An Expensive Cup Of Tea For Investors, But Not So For Starbucks

| About: Starbucks Corporation (SBUX)

Starbucks (NASDAQ:SBUX) recently entered a deal to buy Teavana (TEA) for a much lower price than what investors paid during Teavana's IPO less than two years ago. By paying $15.50 per share in cash, or over 40% lower than Teavana's IPO price in 2011, Starbucks acquired a company that can easily be expanded globally. This could provide significant benefits to Starbucks shareholders. Starbucks could gain due to its recent expansion into India and presence in other international areas where tea is the predominant drink. Also, Starbucks' other recent purchases of complementary businesses that seem more expensive than Teavana, and its solid balance sheet, seem to outweigh the risks that come with the hefty price tag of $620 million (19.6 times Tevana's fiscal 2011 operating income of $31.6 million).

Tevana's common stock is down over 44% since its initial public offering in July 2009, compared to a gain of about 10% for the S&P 500 over the same period. Why would anyone go public only to sell less than two years later? The costs of going public are significant, according to a recent study by accounting powerhouse PricewaterhouseCoopers (on average, 5.5% of the net proceeds for a company the size of Teavana). Oftentimes, the reason for going public is so that the owners of the company can cash out. Indeed, prior to the IPO the company's founder, Andrew Mack, had 26.2 million shares that dwindled to 21.5 million less than a year following the IPO. Similarly, a director at the company who held 9 million shares before the IPO had 6.1 million following the IPO, according to SEC filings. The buyers of Mack's and the director's shares incurred a loss of $12.8 per share ($28.2 IPO price less current price of about $15.40, assuming shareholders bought at the IPO and are still holding the shares) for a cumulative loss of $97 million (7.6 million shares x the $12.80 share price decline since the IPO).

While investors are paying a steep price for investing in Teavana at its IPO price, Starbucks might be actually acquiring the company at a bargain. The Teavana brand will be easy to export around the world. Starbucks already has the Tazo tea brand. However, it is much smaller than Teavana, which has over a hundred varieties of teas and also sells tea accessories. In addition, Starbucks is already in China and Japan and recently expanded to India, countries where tea consumption is a lot more popular than in the Western markets. Tea is also popular in the Middle East and certain parts of Europe (the U.K. and Ireland). These are all areas where Starbucks is growing.

While the acquisition is not cheap, compared to other recent purchases made by Starbucks it seems to be a bargain. For comparison, let's look at some recent Starbucks acquisitions. Prior to the Teavana purchase, Starbucks bought a San Francisco-based bakery for $100 million, La Boulange. It had 19 stores at the time of the deal, which is slightly over $5 million per store. Teavana had 301 company-owned stores in Canada and the U.S. and 19 franchised stores in Mexico. Thus, the price per Teavana store that Starbucks paid is significantly lower at $1.94 million per store (price of $620 million divided by 320 stores). The purchase of Evolution Fresh was even more expensive, as the company was sold to Starbucks for $30 million. At the time of the deal, Evolution Fresh had no actual stores and its juices were distributed mainly at grocery stores on the West Coast.

In conclusion, it appears as if shareholders who acquired Teavana at the IPO price were shortchanged. However, the deal is likely to close by the end of 2012 as over 70% of Teavana shareholders approve of it, and Starbucks will easily pay $620 million since it had over $2 billion in cash and short-term investments as of Nov. 1, 2012. Investors could buy Teavana shares at the current price of $15.45 and hold it until the deal closes for a gain of $0.05 per share. On an annualized basis, this gain is equal to 6.07%. This is a low-risk type of investment that many institutional investors practice with companies being acquired.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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