Starbucks Corp. (NASDAQ: SBUX) is taking on the fast-growing single serve market, by teaming with Green Mountain Coffee Roasters, Inc. (NASDAQ: GMCR) that holds a dominant share of the U.S. market at about 80 percent owing to several patents surrounding its K-cup.

The Seattle, Washington-based Starbucks will make and sell its coffee and Tazo brand tea via Green Mountain's K-Cup portion packs for use in the Keurig single-cup brewing system.

Today's announcement is a win for Starbucks, a win for Green Mountain Coffee and most importantly a win for consumers who want to enjoy Starbucks coffee with the Keurig Single-Cup Brewing system, said Howard Schultz, Starbucks Chief Executive.

The new relationship will provide Green Mountain with the additional choice afforded by having Starbucks branded coffees available for their brewers. Further, Starbucks stated goals of expanding its presence in premium single-cup coffee, making its premium coffees available to consumers.

The Waterbury, Vermont-based Green Mountain will also make available the Starbucks K-Cup portion packs through food, drug, mass, club, specialty and department store retailers throughout the U.S. and Canada beginning in the fall of 2011.

Further, The Starbucks K-Cup portion packs will be made available through Green Mountain's consumer-direct websites beginning in 2012. Early in 2012, Starbucks stores will begin selling Green Mountain's Keurig brewers, apart from its coffee and tea pods.

Single serve coffee represents a meaningful opportunity for Starbucks as it is a $4 billion a year market globally with U.S. growing rapidly from its current base of about $100 million, said Larry Miller, an analyst at RBC Capital Markets.

Morgan Stanley analyst expects single serve as a big part of Starbucks' future, and if the company aligns with Green Mountain it could see more profitability in the short term, but may be hampered in the longer term.

Kraft Foods Settlement

On March 1, Starbucks terminated an agreement to provide coffee discs for Kraft Foods Inc.'s (KFT) Tassimo one-cup home brewer, according to a Reuters report. At the same time it ended its grocery distribution agreement with Kraft.

Starbucks had highlighted Kraft's failure to meet its contractual responsibilities as reason for exercising its right to terminate the relationship. Kraft took the matter to the U.S. Court, seeking a preliminary injunction against Starbucks for allegedly violating terms of their roast and ground coffee agreement.

Kraft Foods lost on Feb. 25 an appeals court ruling that upholds a decision allowing Starbucks to end a deal whereby Kraft distributes Starbucks coffee to grocery stores. The appeal was heard before the United States Court of Appeals in Manhattan.

Kraft sued in December to prevent Starbucks from ending the arrangement prior to arbitration. In January, U.S. District Judge Cathy Seibel rejected Kraft’s contention that it would be irreparably harmed if Starbucks were to end the agreement.

Starbucks is comfortable with a range of $0-$1.5 billion in cash to settle its packaged coffee dispute with Kraft. It could be zero if Starbucks proves Kraft had breached its contract. If no violations are proved, we estimate Starbucks may end up paying Kraft $1.1-$1.4 billion, said Miller.

Miller said Starbucks would pay this out of its $2 billion of cash on hand. It would (and already has) caused the company to reign in its M&A and share repurchase activity. The transition of the packaged coffee business is expected to cost Starbucks $0.02 net (higher revenues offsetting transition costs).

Impact on Stocks

Due to the deal, Green Mountain stock jumped 30.41 percent to $56.91 at 9:37 am EST while Starbucks stock advanced 8.42 percent to $37.45.

Peet's Coffee & Tea, Inc. (NASDAQ: PEET) stock plunged 13.15 percent to $41.73 at 9:37 am EST, as its competitors Green Mountain Coffee Roasters and Starbucks are taking on the fast-growing single-serve market with a strategic relationship.

As a result of the deal, Kraft Foods stock declined 0.54 percent to $31.50, while McDonald's Corp. (NYSE: MCD) stock moved down 0.01 percent to $75.77.