inspirator schreef op 24 oktober 2013 18:00:
Takeover target
The risk of TomTom being acquired by a competitor must be sickening to its map licensing clients like Apple and Samsung. To imagine a bidding war between the two, just think how they have been at each others throats over patents. And they are not the only software giants with huge buying power interested in maps. Facebook and Amazon would love to snap up the map database if possible. Sure, for now HERE (Navteq) and TomTom compete but when TomTom is snapped up, HERE would be the only option remaining. Not really a safe option given Microsoft’s close ties to the company.
Microsoft financed its deal for Nokia’s device and patent division with offshore cash and the same could be done by a U.S based buyer of TomTom. Saving repatriating costs in the short term.
Samsung in the meantime is looking really hard (according to theVerge) to differentiate their hardware by offering unique software on them, if they brought mapping in house they might be able to take their maps a notch above those offered by arch-rival Apple just like Google did. There was no mention of TomTom on Samsung’s leaked acquisition short-list though.
Google bought Waze one of the most popular mobile mapping and navigation apps back in June for $1.1 Billion. The Verge reports the FTC won’t move to block the sale and has no concerns that Google’s purchase of Waze would hurt the competition. According to the same article this was an defensive acquisition, which significantly increases the odds that TomTom will be acquired as part of a similar tactic.
The map division was bought for $4.3 billion. The cash flow the licensing provides is not fantastic but its value in the marketplace exceeds those revenues because of strategy concerns of big players with deep pockets. The popular Waze app that Google didn’t really need sold for $1.1 Billion. It seems likely this part is worth a $1 Billion figure to the right bidder. Revenue minus licensing revenue should be worth at least 1x sales and that’s another $1.1 Billion.
Given these modest assumptions a bidder could easily afford to bid $2.1 Billion or 16% over the current share price. I think the bottom range of bids would come in around that level.
Break-up/Spin-off
What if the company is broken apart or spins-off some units?
Although most of the divisions are struggling, the Business Solutions division is growing at a pretty good clip. In the second quarter Business Solutions reached 269,000 WEBFLEET-subscribers and delivered growth of 29% year on year. TomTom launched the Tachograph Manager which allows businesses (like long haul trucking) to manage driving-time compliance efficiently. The Tachograph Manager supports remote and manual download, and archiving and analysis of driver data to comply with national and European legislation.
This division could function perfectly fine by licensing the mapping data and could be spin-off to allow it to grow faster and create value for shareholders. Structured like this the divisions growth rate wouldn’t be dragged down by the capital intensive map business and the mapping business could be sold more easily.
(click to enlarge)
To value the parts of the business if broken up, I took the value of Tele Atlas arrived at earlier. Used a conservative multiple of 1x sales to value the declining business of the big divisions of consumer and automotive, that I applied before as well. The high growth Business Solutions division is the hardest part to value. It’s still relatively small but going by current sales, estimated margins and applying a high growth multiplier I arrived at $330 million.
The break up value would of the company adds up to $2.3 Billion or a 29% premium over the current market cap. Just like the take over scenario, I think this is around the bottom of the valuation range if the scenario were to be realized.
Risks
One big risk of an investment in TomTom is that TomTom’s founders (Peter-Frans Pauwels, Pieter Geelen, Harold Goddijn and Corinne Vigreux) control close to 50% of the company and so far haven’t shown to be eager to sell-out. However they are intelligent individuals and might see the value a breakup or sale of the company could create. If TomTom could become part of a legendary company like an Apple or Facebook that could ease their pain.
If they can’t be convinced of the value of a sale it will be hard to make it happen. The company has multiple anti-take over defenses to employ against raiders. In addition to an independent foundation that can issue preferred shares to dilute a raider, the board can do so as well.
What if you have to hold it?
TomTom is not a great company to have to hold on to. In the paragraph the future is bleak I discussed falling revenue and better positioned substitute products.
In addition I see no sustainable competitive advantages. It’s not a good bet to return market beating returns over long periods of time.
But the company can also be bought at a very low price given it’s cash flow. EV/CFF is around 5, the P/E multiplier is at 11 and it has a book value of $4.90 per share. From a valuation perspective the company compares favorably to the broader market. A good start to outperformance. The business doesn’t need to grow to outperform. If the negative growth can be stopped that will likely be enough.
The part of its business I’m most worried about is it’s PND business. If you look at TomTom’s main competitor in the PND business , aside from every smartphone maker, there is Garmin (GRMN) which trades at a P/E of 18 and a EV/FCF of 15 with a book value per share of $17.
Meanwhile Garmin has no map database of its own but has to license it from Navteq. Is Garmin really that much better? I don’t think so.
TMOAF PE Ratio TTM data by YCharts
Conclusion
TomTom can become the target of a bidding war and fetch upwards of $2.1 Billion or a 16% premium. It can be broken up in different parts to unlock about $2.3 Billion in value or a 29% premium over the current market cap. Finally the company can continue business as usual but the market might realize the valuation of the company is very low compared to the market in general and competitor Garmin and close the gap in valuation.
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