TomTom (OTCPK:TMOAF) is an owner/operated company that got its start producing personal navigation devices or PNDs. Before smartphones started killing that space this was a rather successful business. When the good times were rolling, TomTom acquired map-making company TeleAtlas in '08 for €2.9 billion. Today, it is the last remaining independent global mapping database. On May 30, 2018, I wrote about TomTom for subscribers to the special situations report.
In that article, I wrote about the value that could be unlocked by spinning off Telematics. This article re-examines where this idea stands given the Telematics segment was just sold.
Telematics got sold
Yesterday, the company announced the sale of its Telematics segment to Bridgestone (OTCPK:BRDCF) for €910 million, €750 million of which will be distributed to shareholders by means of a capital repayment that isn't subject to dividend tax. We are down about 14% on the idea and the market didn't respond favorably to the announcement. That can only mean the market expected more for the high growth Telematics segment:
Expectations on the remaining stub appear very low. Telematics generated only 20% of the entire company's revenue.
Source: slide from most recent earnings call
Valuation of TomTom
TomTom trades at an enterprise value of about €1.54 billion. The company will return about half of that number to shareholders by the third quarter of 2019.
It adds another €160 million to its balance sheet, meaning the entire enterprise value will go down to €640 million.
That buys you about €650 million in revenue for 2018 adjusted for the Telematics sale, or in effect you are paying about ~1x sales.
To put this into context, its better known U.S. competitor Garmin (NASDAQ:GRMN), without any unique map asset, trades at about 3.9x sales:
Curiously, only about 1/3rd and by that time about 1/2 of TomTom's sales are from hardware devices linked to the consumer business selling PDAs. The remainder is related to the exploitation of TomTom's unique asset with the last remaining independent map database. A comparable map set called HERE was acquired in the past from Nokia for $3.1 billion by Audi AG (OTCPK:AUDVF), BMW (OTCPK:BMWYY) and Daimler Group (OTCPK:DDAIF).
Meanwhile, TomTom is generating ample free cash flow:
Now, I do expect the Telematics sale to take a big bite out of free cash flow. The segment generated strong margins and I estimate there will be something in the neighborhood of €80 million in free cash flow left. But given the valuation of the stub, that's a lot of money.
Revenue from PNAs isn't all that exciting because I believe it is ultimately unsustainable. However, licensing map and other navigation data is a real and solid business. Going forward, TomTom is focusing on ways it can add value to an autonomous world. To get there, the company made some acquisitions but is also investing much into R&D. R&D at founder lead companies is usually well spent, and in the Netherlands, it confers sustainable tax benefits.
The bottom line here is that the valuation of TomTom makes little sense to me. The current price is implying an ~8x free cash flow multiple for a company that is spending big on R&D (conferring upside optionality) with a unique asset (with comps sold at a multiple of the company's valuation) and that's tied to an emerging business in an autonomous driving future. TomTom is still a buy because you can own a unique asset through a cash flow positive entity that is innovating for the future.
Check out the Special Situation Investing report if you are interested in uncorrelated returns. We look at special situations like spin-offs, share repurchases, rights offerings, M&A events, etc. But we also have a keen interest in the commodity space. Especially in the current late stages of the economic cycle
Disclosure: I am/we are long 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.