1. Advanced Finance
Analysis and recommendations
on TomTom
EMBA – 09
Roel Kock
Date: 20 June 2009
2. 1. Overview of indystrie
Garmin was the #1 GPS brand in the United States in 2007. In Europe, Dutch-based company TomTom
enjoys the #1 spot. Since the satellite navigation industry has low entry barriers, the list of entrants is long
and growing 1.
Figure 1 Market Share 2007 Europe Figure 2 Market Share 2007 USA
Canalys estimates that in 2008, Garmin increased its global market share in the portable navigation device (PND)
market to 33.7%, up from 27.8% in 2007. This represents a year on year increase of 5.9% 2.
Producers of personal navigation devices are facing tough times from keen competition—namely cell phones—
Companies like TomTom and Garmin are facing a barrage of competition from cell-phone manufacturers as well as
slumping demand from consumers who are putting off purchases (of the device or car purchase with integrated
device) as a consequence of the faltering economy.
Personal navigation device (PND) sales surged in recent years as consumers increasingly purchased these
compact, mobile gadgets which use mapping technology and GPS signals to help users find their way around.
However, cell-phone makers such as market leader Nokia have incorporated navigation technology directly into
handsets, rendering some PNDs obsolete. Nokia's ultimate goal is to make navigation in mobile phones as
ubiquitous as built-in cameras. Nokia plans to include navigation features in roughly half of its phones in the next
two to four years, Wood says. And while TomTom will sell 14 million to 15 million devices this year, Nokia will sell
some 400 million phones this year, roughly half of which will be navigation-ready. Therefore, navigation devices as
a product are beco ming a commodity they’re having a hard time finding a unique selling point. New threats, such
as Dash Navigation, appears on the business landscape.The company's Dash Express device connects to wireless
phone networks to download constantly updated traffic information (from other dash devices). The device also has
internet access and can receive e-mails 3.
Another threat to the portable navigation industry, Autonet Mobile will be outfitting the Cadillac with in-car WiFi.
Using nothing more than a small router, branded Cadillac WiFi, Autonet Mobile will enable anyone driving a Caddie
sports sedan to check email, watch videos, surf the web, and check online services for traffic updates, weather
information, place reviews and other things that PND’s are differentiated upon.
Some navigation device makers are trying to cope through consolidation. TomTom shook up the industry last year
when it made an unexpected $2.3 billion bid to acquire TeleAtlas, a Dutch maker of mapping software used in PND
devices and one of the two companies serving the entire PND industry. TomTom ultimately won the bidding war that
ensued with Garmin. The other mapping technology vendor, Navteq (NVT), is acquired by Nokia. The company's
future may lie in wireless phones as well. TomTom has got to leverage its strong brand and license it to phone
manufacturers like Sony Ericsson and Samsung. Just as we have seen camera lens brands being used in mobile
phones, TomTom should exploit its brand power and offer mobile-phone solutions powered by TomTom. Garmin
has its eye on phones, too. In January it unveiled the Nuvifone, a wireless phone with a large screen that contains a
navigation system 4.
2. Context of the company
3. Tom Tom, consumer navigation systems. The Dutch company Tom Tom, founded in 1999, was originally
specialized in supplying BtoB software applications for mobile phones. In 2001, it moved into designing its first
navigation system for PDAs and smart-phones in partnership with the major leaders in the field: PALM, Microsoft
and HP. Tom Tom Navigator was born, followed in 2004 by Tom Tom Go for drivers, and not least its new
integrated or non-integrated consumer products such as Tom Tom Rider for motorcycles and scooters, and more
recently Tom Tom Plus which offers, in addition to its traditional navigation functions, a multitude of associated on-
line subscription services 5.
The acquisition of TeleAtlas was not a done deal. July 23, 2007 TomTom announced a public offering for all
outstanding shares of TeleAtlas of 21.25 in cash per share.
October 31, 2007 TeleAtlas receives an unsolicited proposal from Garmin to communicate its intention to make a
public offering for all of the outstanding shares for € 24.50 per share in cash. Garmin had the best cards in its
hands. The company had twice the stock market value, a higher cash flow and equity that is 75% higher than
TomTom.
Three scenarios could have happened.
1. Garmin withdraws from the deal and TomTom buys TeleAtlas for a nice price of 21.25 per share.
2. TomTom raises the price of the offer and makes Garmin pay the bonus price for the takeover. TomTom
would have gotten a nice profit for it; 29% of shares in TeleAtlas.
3. TomTom buys TeleAtlas at a higher price.
The latter happened and Garmin made TomTom pay € 800.000.000 more than TomTom had intended in the
beginning of 2007.
On November 7, 2007 TomTom announced that it had terminated its previous offer and intended to make a new
cash offer of € 30 in cash per share. The intended offer would be an all-cash offer for all of the issued and
outstanding share capital of Tele Atlas. Based on the offer price, the intended offer valued the fully diluted
outstanding share capital of Tele Atlas at approximately €2.9 billion. The offer represented a premium of 81% to the
last closing price of 20 July 2007 (the day prior to the announcement of the previous offer), 41% more than the
previous offer and 22% more than the offer made by Garmin Ltd. The aggregate value of the proposed transaction
is approximately €2.9 billion, including the net financial cash position of Tele Atlas. This implies a multiple of
approximately 41 times the projected 2007 adjusted EBITDA for Tele Atlas. Goldman Sachs International, ABN
AMRO Bank N.V. and Rabobank are providing committed financing (€ 1.6 billion) for the acquisition at a debt ratio
of 3.5 EBITA which is € 450 million in 2007. On June 5th, 2008 , the acquisition was completed.
During the summer of 2007 the credit crises stared. Its size and impact became clear in the beginning of 2008. The
crises made the market nervous about the level of sales of TomTom. This the stock price to decrease. Furthermore,
a decrease in sales might put pressure on the lending ratio of 3 times EBITA. If TomTom could not secure a loan, it
might need to issue more shares. Even more shares than it initially thought due to the lower stock price. The threat
of issuing shares forced the stock price to decrease even further.
3. Financials
3.1 Income Statement
2005 2006 2007 2008 2009 2010 2011 2012 2013
Revenue 720 1,364 1,737 1,674 1,691 1,708 1,725 1,742 1,759
CoS 409 785 973 893 902 911 920 930 939
Contribution 311 579 764 781 789 796 804 812 821
Overhead 116 238 336 1,581 540 545 550 556 562
EBIT 195 340 428 -801 249 251 254 256 259
Tax and interest (52) (118) (111) (71) (104) (92) (79) (37) (38)
NPAT 143 222 317 -872 144 160 175 219 221
Dividends 0 0 0 0 0 0 0 0 0
Retained Earnings 143 222 317 -872 144 160 175 219 221
With the completion of the acquisition of TeleAtlas, 2008 was a year of strategic importance. The volume of PND’s
sold increased by 26% to 12 millions. The average selling price decreased by 31%. The decrease in revenues of
10% was caused by decreases in Europe (-21%) and the rest of the world (-28%) but was off set by an increase in
America (+47%). The Gross Margin of TomTom decreased from 44% to 40%. Group margin remained stable
because of the margin on TeleAtlas. In the overhead, an impairment charge of € 1.047billion is included because of
a decrease of the enterprise value (TeleAtlas). So TeleAtlas was bought for € 2.9 billion in 2008 and in the same
year an impairment charge of €1.407 billion was booked.
Interest paid on the TeleAtlas borrowing is € 66 million (only for 7 months). On a yearly basis the interest
percentage would be 8.2%.
Forecast
4. With a growth of 1%, TomTom is showing positive retained earnings but because of an increase in overhead (R&D
and Selling), the margins have decreased.
3.2 Financial Statement
Assets 2005 2006 2007 2008 2009 2010 2011 2012 2013
Goodwill 855 855 855 855 855 855
Deferred tax asset 1 12 24 33 33 33 33 33 33
Assets 22 59 915 1,103 1,103 1,103 1,103 1,103 1,103
22 59 915 1,958 1,958 1,958 1,958 1,958 1,958
Total current assets 263 406 591 488 488 488 488 488 488
Total current liabilities 146 341 575 575 575 575 575 575 575
Working capital 116 65 16 -87 -87 -87 -87 -87 -87
TOTAL ASSETS 139 124 931 1,870 1,870 1,870 1,870 1,870 1,870
Equity and Liabilities 2005 2006 2007 2008 2009 2010 2011 2012 2013
Share capital and other 150 173 656 707 707 707 707 707 707
Retained earnings 156 378 697 -194 -50 110 285 504 725
Total shareholders' Equity 306 551 1,352 513 658 817 992 1,212 1,433
Borrowings 1,388 1,230 992 755 0
Cash and cash equivalents 178 438 463 321 307 229 167 -369 -148
Provisions, Tax and Liabilities 11 11 42 290 290 290 290 290 290
Total non-current liabilities -168 -427 -421 1,357 1,213 1,053 878 658 437
TOTAL EQUITY AND LIABILITIES 139 124 931 1,870 1,870 1,870 1,870 1,870 1,870
Repayment schedule borrowing 159 238 238 755
The impairment charge decreased the goodwill from 1895 (pro forma 1007) to 855 end of 2008. This charge also
decreases the total equity to 513 million (retained earning deficit of € 194 million).
3.3.Free cash flows
Free cash flow was negative in 2007 because of the investment in TeleAtlas. In 2008 the FCF was negative due to
the remaining investment / acquisition in TeleAtlas. The remaining investment in TeleAtlas was 2.1 billion. If not for
the investment in TeleAtlas the cash flow would have been positive in both years (420 million in 2007 and 361
million in 2008).
Free Cash Flow 2005 2006 2007 2008 2009 2010 2011 2012 2013
NOPAT 235 296 -554 172 174 176 177 179
Depreciation
CAPEX 37 856 1,042 0 0 0 0 0
Increase in net working capital -52 -49 -103 0 0 0 0 0
250 (511) (1,493) 172 174 176 177 179
The current FCF is sufficient to meet the repayment schedule in 2009 but thereafter Tom Tom does not have
enough FCF for the repayments. The income statement is showing that TomTom earns about 100 (equal to the
interest payments) on cash, results on associates and currency. A decrease in these three could result in a 50%
decrease of NOPAT. This could lead to further decrease of FCF and threat of interest payment problems.
4. WACC and Ratio’s
Beta Plot
20%
y = 1.2311x - 0.0018
2
R = 0.3537 15%
10%
5%
TomTom
0%
-15% -10% -5% 0% 5% 10% 15%
-5%
-10%
-15%
Figure 3 US Treasury Bond Yield of 9 may 2009
-20%
-25%
AEX
Figure 4 Beta Plot Tom Tom and AEX
The beta plot of TomTom vs. AEX over the last two years indicates a beta of 1.2311. At Bloomberg a beta of 1.347
is reported. In the annual report TomTom quotes a Risk Free Rate (RfR) of 3.96%. The 10-year US bond is
currently 3.28% 6. For the WACC calculation it is assumed that the MRP is 6%. The Ke is between 10.67% and
11.75%. The cost of debt is 8.2%. The WACC (2009) is 7.43% and 7.81%. In the annual report TomTom has
calculated a WACC of 10.6%. Since this WACC is more conservative in the NPV of FCF, the WACC of TomTom will
be used when determining the value of TomTom.
5. Ratio 2005 2006 2007 2008 2009 2010 2011 2012 2013
Gross Margin 43% 42% 44% 47% 47% 47% 47% 47% 47%
Interest cover 261.15 187.45 436.10 (12.12) 2.47 3.09 4.10
D/E ratio (0.5) (0.8) (0.3) 2.6 1.8 1.3 0.9 0.5 0.3
No of Shares 107 112.9 121.8 123.3 123.3 123.3 123.3 123.3 123.3
EPS 1.3 2.0 2.6 -7.1 1.2 1.3 1.4 1.8 1.8
ROE 47% 40% 23% -170% 22% 20% 18% 18% 15%
Net debt / EBITDA -1.2 -0.9 4.6 4.9 4.2 3.5 2.6 1.7
Although TomTom declined to give any details on its loan covenants, analysts say the company is required to stay
below a et to EBITA ratio of 3. The pressure on the loan covenants forced the company to renegotiate its debts
terms at the end of last year. Breaching its debt covenants (again) might force TomTom to a right issue or even a
take-over of TeleAtlas or TomTom as a whole. So the debt covenants and the (small) FCF is putting a lot of
pressure on TomTom.
5. Value of the company
The NPV of the Free Cash Flow is € 1,794 million and with the cash (begin of year) € 2,115 million. The NPV of
equity is € 758 million which gives a share price of € 6.14. Based on the above calculations, this share price will
increase with 50% in the coming 3 years. This increase is mainly due to the decrease of debt in the NPV of FCF
calculation. So whether TomTom can meet its repayments (and interest payments) is determining the value of the
company.
The EVA, for the coming year, is negative because of the low NOPAT. And with a negative EVA the MVA of the
company is also negative. So MVA is presenting a negative stock price.
6. Compare to stock price development
