Buy TomTom On M&A Rumors Before It's Too Late
Aug 6 2015, 11:12 | About: TMOAF | Includes: AAPL
Summary
Nokia finally sold its mapping business to a consortium of car manufacturers.
TomTom owns the last independent mapping service provider.
Too many companies failed to acquire Nokia HERE, so now they will turn to TomTom.
The expected deal between Nokia (NYSE:NOK) and a consortium of three German car manufacturers to acquire Nokia's mapping business was announced recently. Audi (OTCQX:VLKAY), BMW (OTCPK:BAMXY) and Daimler (OTCPK:DDAIF) paid $3.1 billion for HERE or about 2.5 times this year's revenue. If the deal is approved by antitrust regulators, one of the two remaining independent mapping service providers will not be independent any more. As a result, only one mapping service remains independent: TomTom (OTCPK:TMOAF).
Before the deal between Nokia and the German car manufacturers was announced, many other companies were named as potential acquirers for Nokia HERE. Among these companies were large technology companies like Microsoft (NASDAQ:MSFT), privately-owned Uber Technologies and Baidu (NASDAQ:BIDU). Interest for Nokia HERE was high because of the strategic importance of owning a mapping business. Technology is developing fast and maps could play an important role in future developments. For example, Uber Technologies' interest in HERE was driven by its self-driving car ambitions.
With Nokia HERE unavailable for purchase, there will not be many suitable mapping services left for the companies who could not acquire HERE. In fact, there's only one player left and that player happens to be TomTom. Not surprisingly, the market is looking at TomTom's mapping business as the next target to be acquired by one of the other contenders for Nokia HERE. Apple (NASDAQ:AAPL), one of TomTom's most valuable customers, might even be among the potential candidates as well.
Given the strategic value of owning a mapping business and the importance for future technological developments, an acquisition of TomTom's mapping business should be just a matter of time. In my opinion, too many companies went in strong to acquire Nokia HERE and came out empty handed. As a result, these companies will just reset their focus and go after TomTom's mapping business. And a positive note, any deal with TomTom is likely to be cheaper than the $3.1 billion price tag for Nokia HERE.
TomTom's mapping service revenue cannot compete with HERE's revenue of $1.1 billion revenue in 2014. TomTom's automotive and licensing businesses totaled only $250 million in 2014. However, TomTom is in a great position to set a big price tag because it's the last remaining independent mapping service provider. As a result, the stakes are higher for potential acquirers than they were with the HERE acquisition. As a result, I expect interest in TomTom's mapping business to be even higher than for Nokia HERE.
TomTom fueled speculation by stating that the company is exploring options to sell its mapping technology. This is anotherindicator that such a sale is inevitable. One company to watch is Apple. The company signed a contract with TomTom to supply Apple mapping services. Apple could decide to buy the mapping technology from TomTom instead of seeing a competitor walking away with it. This could be a hit for Apple's long-term automotive ambitions.
One party that will be among the winners of a potential acquisition of TomTom's mapping business are the company's shareholders. In my opinion, TomTom should be able to sell its mapping business for at least $1 billion or 40% of the company's total market capitalization of $2.5 billion. This price tag is one-third of the acquisition price of Nokia HERE given TomTom's lower revenue, but reflects the fact that TomTom owns the last independent mapping business. No doubt that a part of this sum will flow to the shareholders through a special dividend or a share buyback program.
Further, TomTom should consider more strategic acquisitions in the telematics business. As I already discussed in this article, telematics are probably the most important business for TomTom in terms of revenue and net income growth. With the cash from a potential sale of the company's mapping business, TomTom will be able to increase both the number and scale of strategic acquisitions in the telematics segment. In my opinion, TomTom has the potential to become one of the leading telematics companies in the world.
Conclusion
So, all considered investors should buy TomTom before it's too late. In my opinion, a sale of the company's mapping business is just a matter of time. The acquisition price for TomTom's mapping business will not be as large as the price tag of Nokia HERE. However, TomTom should be able to ask for at least $1 billion considering that the company owns the last independent mapping business and interest in mapping service providers is high.
Disclosure: I am/we are long AAPL, MSFT, TMOAF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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