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Originally published November 14, 2012 at 12:36 PM | Page modified November 15, 2012 at 3:33 PM

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Starbucks to buy tea chain in $620M deal

Starbucks plans to buy Teavana Holdings, an Atlanta-based chain of 300 mall-based tea stores, for about $620 million in cash.

Seattle Times business reporter

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Starbucks’ acquisition tear continued Thursday, when the cash-rich company announced plans to buy Teavana Holdings, a chain of 300 mall-based tea stores, including seven in Washington.

The $620 million cash deal marks Starbucks’ third acquisition in 13 months.

Starbucks said it expects to add non-mall stores to Atlanta-based Teavana’s portfolio and more beverages to its menu.

The news comes five months after Starbucks announced it would take its Tazo tea brand into retailing. That brand’s $1.4 billion in annual sales now come from grocery and cafe sales.

With the Teavana acquisition, executives aren’t sure whether Tazo’s retail presence will grow beyond a pilot location opening this week at University Village.

In addition to Teavana, the company paid $30 million last fall for a California juicery called Evolution Juice, and $100 million in June for a small bakery chain called La Boulange.

Even after years of paying dividends, the coffee company was sitting on $848 million in cash when its fiscal year ended Sept. 30.

Although U.S. consumers traditionally prefer coffee, Starbucks CEO Howard Schultz said they are ready to embrace the tea version of Starbucks. He considers the popularity of ready-to-drink tea beverages such as Arizona Tea and Honest Tea to be “a great litmus test.”

Adding more drinks to Teavana’s menu reminds him of Starbucks’ decision in the ’80s to add coffee drinks after years of selling mostly whole-bean coffee.

He praised Teavana’s economics, which include a $40 average sale or “ticket,” compared with Starbucks’ roughly $5. And Teavana’s operating margins top 30 percent.

After Starbucks said in June it was taking the Tazo brand into retail, analyst Sharon Zackfia at William Blair wrote a note to investors reminding them of Teavana’s sales strength.

“It also remains a question as to how effective Tazo’s selling and educational techniques will be for a U.S. customer base that remains largely untutored in the art of tea,” she wrote.

Teavana already has moved into foreign markets and recently opened its first store in the Middle East in partnership with Alshaya, which also partners with Starbucks.

The acquisition, which requires regulatory approval, is expected to close later this year. A majority of Teavana’s shareholders, who would receive $15.50 a share, have already approved the sale. The deal is expected to add a penny to Starbucks’ earnings per share in fiscal 2013.

The news sent Teavana’s shares to $15.45 Thursday, up 52 percent, or $5.32. Starbucks stock fell 3 percent, or $1.47, to $48.84.

Teavana will continue to be run out of Atlanta by co-founder Andrew Mack.

Starbucks coffee will not be sold in Teavana stores, and the company has not decided whether Teavana teas will be offered in its cafes. Eventually, Starbucks customers will be able to use their rewards cards in Teavana stores and vice versa.

Melissa Allison: 206-464-3312 or Twitter @AllisonSeattle.

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