Starbucks to Buy Its Biggest Coffee Bar Rival

Starbucks Coffee Co. took a big step Tuesday in its aggressive expansion into the Northeast, saying it plans to buy its biggest rival in the region, Boston-based Coffee Connection Inc.

Terms of the deal were not disclosed.

Starbucks’ stock rose sharply on the deal, which analysts called good news for the Seattle-based purveyor of specialty coffee drinks. The stock gained $2.25 to $24.50 in midday Nasdaq trading.

“It’s a very, very positive announcement,” said Trica Reebs of Dain Bosworth. “This gives Starbucks a much broader reach, great locations, and it’s always good to get rid of one of your competitors.”

Starbucks, which has 300 coffee bars, mainly in the West, has been bringing its espresso drinks east with stores in Chicago and Washington. It has announced plans to break into New York, Boston and Minneapolis this year.

The privately held Coffee Connection, with 22 stores and a strong reputation in the Boston area, has been “one of the major negatives hanging over Starbucks,” said Matthew Patsky of Robertson, Stephens & Co.

George Howell, chief executive officer of the Coffee Connection, said in a statement that he was confident Starbucks would “maintain the integrity of the Coffee Connection brand.”

Patsky pointed out that the Coffee Connection has its own coffee-roasting facility, eliminating the need for Starbucks to build a costly East Coast plant.

He said Starbucks, which plans to open at least 78 more stores in the current fiscal year, will be able to save money through economies of scale.

“I wouldn’t be surprised if the stock were to continue to trade higher,” he said.

Starbucks, which went public in June, 1992, more than doubled to nearly $27 a share in its first year but has since drifted as low as $19.50.

Under a letter of intent the two companies have signed, Starbucks plans to acquire 100% of the Coffee Connection in exchange for newly issued shares of stock.

Analysts said they expect the deal to be neutral or positive to Starbucks’ earnings in the near term, but said they could not make any forecasts because the company has refused to reveal any details of the deal.

Patsky said the tough New York market has no similarly entrenched competition in the specialty coffee business and predicted Starbucks would be dominant in New York within a year or two at most.