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Starbucks Corporation (SBUX - Analyst Report) recently announced the closure of its previously-announced deal to acquire Atlanta-based Teavana Holdings, Inc. , a specialty retailer of tea, for approximately $620 million in cash. Teavana has now become a wholly owned subsidiary of Starbucks.

Teavana operated through 300 mall-based stores, which Starbucks plans to expand. Starbucks is also planning to establish new stand-alone Teavana neighborhood stores domestically as well as internationally. Moreover, Starbucks plans to open tea bars (which will create customized tea beverages) inside these stores, which presently sell only loose-leaf teas and related merchandise.

We believe that the collaboration of Starbucks and Teavana provides the former a global opportunity to create a unique retail experience in the $40 billion tea category. When Starbucks announced the deal in mid-November, it claimed that tea is the world’s second largest beverage category that offered a large scope for innovation, which Starbucks plans to exploit. However, management stressed that focusing on tea does not signal a slowdown in its core coffee business.

The acquisition is complementary with Starbucks’ already existing core tea business of Tazo tea. Starbucks sells Tazo tea in stores as well as across the foodservice channels. Over time, Starbucks plans to create a two-tiered business, where both the Tazo and Teavana branded products will co-exist.

Starbucks is constantly on the lookout for new businesses that are complementary with its core coffee offerings. Six months ago, Starbucks acquired bakery chain La Boulange, and a year back it bought Evolution Fresh juice stores to expand its footprint beyond coffee. Teavana is another step in that direction.

Teavana’s shareholders received $15.50 per share in cash for the merger. The acquisition is expected to add a penny to 2013 earnings.

Our Recommendation

We currently have a long-term Neutral recommendation on Starbucks. However, the stock carries a Zacks #2 Rank (a short-term Buy rating). Starbucks competes with McDonald’s Corp. (MCD - Analyst Report) which carries a Zacks#3 Rank (short term ‘Hold’ rating).

Starbucks is gaining momentum following the solid results in fiscal 2012; regular product innovations like the at-home coffee machine, Verismo; and great strategic deals like La Boulange, Evolution Fresh and now Teavana.

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