Got TEA? Pesticide-Filled Goodness

Glaucus Research, a research-driven short selling firm similar to Muddy Waters/Citron Research, released a report and follow up on this month about the recent deal by Starbucks (NYSE: SBUX) to acquire Teavana Holdings, Inc. (NYSE:TEA). The latter is a retail-based seller of organic/premium tea and is a growing segment for SBUX.

In short, Glaucus alleges that TEA's tea, far from organic and premium, is pesticide-ridden and in violation of EU pesticide standards and by extension US FDA regulations. As a result, SBUX's acquisition (and TEA's entire business) is in danger of falling apart.

What is truly interesting about this particular situation are the odds involved. SBUX's acquisition price of ~$650mm equates to roughly 16$ per share. At current prices of $14.50, conservatively speaking, short sellers are risking $1 per share.

How about the upside? Prior to the sale, TEA was already at 52-week lows at 10.50$ , that's $4 a share downside even if just acquisition fails. However, the reason for such a failure would be a drastic negative on the stock, especially given the due diligence that SBUX would have uncovered to scuttle the deal. In reality, the lower bound of the stock may be $5 or even lower, given legal/business model risk.

So, before further analysis, short sellers are getting better than 2 to 1 odds with a predefined catalyst (acquisition due-diligence)

*Disclosure: I am short TEA

-Stanley