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Mba Tomtom
Mba Tomtom
Mba Tomtom
Mba Tomtom
Mba Tomtom
Mba Tomtom
Mba Tomtom
Mba Tomtom
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Mba Tomtom

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Advanced Finance …

Advanced Finance
Analysis and recommendations
on TomTom

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  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
  6. 7. Excell sheet 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 Interest income 3 9 20 14 14 14 14 14 14 interest expense 1 2 1 66 101 81 62 0 0 Other financial results 12 -32 -16 72 72 72 72 72 72 Results on associats 0 0 -1 13 13 13 13 13 13 Tax 67 93 114 78 76 83 90 110 110 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 -872 144 160 175 219 221 172 174 176 177 179 Assets 2005 2006 2007 2008 2009 2010 2011 2012 2013 Goodwill 855 855 855 855 855 855 Intangible assets 16 39 56 1,011 1,011 1,011 1,011 1,011 1,011 Property, plant and equipment 5 8 18 53 53 53 53 53 53 Investments 817 6 6 6 6 6 6 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 Inventories 103 123 131 145 145 145 145 145 145 Trade receivables 151 266 403 290 290 290 290 290 290 Other receivables and prepayments 5 16 31 16 16 16 16 16 16 Other financial assets 4 1 27 37 37 37 37 37 37 Total current assets 263 406 591 488 488 488 488 488 488 Trade payables 55 67 152 152 152 152 152 152 152 Borrowings Taxes and social security 16 73 89 29 29 29 29 29 29 Accruals 43 89 154 150 150 150 150 150 150 Provisions 11 34 54 57 57 57 57 57 57 Other liabilities 21 79 126 187 187 187 187 187 187 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 21 23 24 25 25 25 25 25 25 Share premium 115 115 567 576 576 576 576 576 576 Legal reserves 2 3 6 32 32 32 32 32 32 Stock compensation reserve 12 32 59 69 69 69 69 69 69 Minority interest 5 5 5 5 5 5 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 Provisions 10 10 42 56 56 56 56 56 56 Long term liability 0 0 0 5 5 5 5 5 5 Borrowings 1,388 1,230 992 755 0 Cash and cash equivalents 178 438 463 321 307 229 167 -369 -148 Deferred tax liability 1 1 0 229 229 229 229 229 229 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 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 check line -15 807 939 0 0 0 0 0 check line -15 807 939 0 0 0 0 0 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 Risk Free Rate (annual report) 3.04% 3.74% 3.96% 3.96% 3.96% 3.96% 3.96% 3.96% 3.96% Growth 1% TAX 32% 30% 27% 31% 31% 31% 31% 31% 31% # PNDs sold (mio) 1.69 4.69 9.57 12.03 Average # Employees 627 1,078 3,498 Average PND Price 368 270 170 118 WACC (annual report) 10.6% Beta 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 Ke 10.84% 11.54% 11.76% 11.76% 11.76% 11.76% 11.76% 11.76% 11.76% Kd -0.45% -0.43% -0.23% 4.87% 8.20% 8.20% 8.20% 8.20% 8.20% MRP 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% WACC (Calculated) 24.29% 52.39% 17.15% 7.34% 7.81% 5.14% 6.24% 99.00% 9.01% Interest on borrowing 8.2% 3.75 Beta Bloomberg 1.3470 Market cap (bloomberg / in millions) 638.47 D/E Ratio (Cap) 2006 2007 2008 2009 2010 2011 2012 2013 NPV of FCF -15551.109 2115.278191 2119.182154 2059.46471 2015.14488 1498.10689 Debt -421 1,357 1,213 1,053 878 658 NPV of Equity -15,130 758 907 1,007 1,137 840 Share Price (FCF Based) -122.6944 6.14926847 7.352401351 8.162866315 9.221587846 6.808583509 20% 11% 50%
  7. 1 http://www.gpsmagazine.com/2008/05/gps_brands_market_share_data_f.php Last retrieved 22/05/09 2 http://www.reuters.com/article/pressRelease/idUS95910+17-Mar-2009+BW20090317 Last retrieved 22/06/2009 3 http://www.businessweek.com/technology/content/apr2008/tc2008048_819969_page_1.htm Last retrieved 22/06/2009 4 http://www.businessweek.com/technology/content/apr2008/tc2008048_819969_page_2.htm Last retrieved 22/06/2009 5 http://uk.finance.yahoo.com/q/pr?s=TOM2.AS Last retrieved 22/06/2009 6 http://finance.yahoo.com/bonds/composite_bond_rates Last retrieved 09/06/2009

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