EUR 850.00 For Business Accounts Only

Morningstar | TomTom to Sell Telematics to Bridgestone for EUR 910 Million; Maintaining FVE; Shares Fairly Valued

On Jan. 22, TomTom announced that it has reached an all-cash agreement to sell its telematics business to Bridgestone for EUR 910 million, which is only a bit below our EUR 1.1 billion estimate, initially discussed on Sept. 27, 2018. After the deal is completed, likely by the end of the second quarter, TomTom will return most of the cash from the deal to shareholders. We are maintaining our EUR 8 per share fair value estimate for this no-moat and high uncertainty name. TomTom shares took a hit in September after the Renault-Nissan-Mitsubishi Alliance and Google announcement, which placed the shares in 4-star territory. Since then, the stock has recovered, increasing over 35% and trading as high as 5% above our fair value estimate. While the stock is down 7.5% in reaction to the telematics announcement and trading at a slight discount to our fair value estimate, it remains in 3-star territory.

The sale of telematics is not a surprise, as the firm announced such an intention in late September 2018, only a week after the Renault-Nissan-Mitsubishi Alliance said it will use Google’s Android operating system for its cars’ infotainment beginning in 2021. While the sale of TomTom’s telematics may allow the firm to allocate more capital to its automotive segment, we continue to doubt whether such a strategy will pay off in the long run. We believe that the Renault-Nissan-Mitsubishi Alliance and Google deal is likely to result in TomTom’s automotive business losing connected navigation system market share to Google in the future. We think Google’s deal could also affect TomTom’s chances of playing a meaningful role within the advanced driver-assistance, or ADAS, market as a part of autonomous vehicles. Firms such as Alphabet (parent company of Google) with its Waymo self-driving operating systems are more likely to work closely with a variety of OEMs and possibly prevent TomTom’s ADAS offerings from gaining traction in that market.

The EUR 910 million price at which TomTom is selling telematics represents 5 times and 14 times our 2019 revenue and EBITDA estimates for that segment, respectively. The firm plans to use EUR 750 million of it to reward shareholders via a combination of cash payment and a reverse stock split. While TomTom did not provide any details about its revenue growth after the transaction is completed, we estimate a nontelematics top-line decline of 7% this year and 4% in 2020, as the secular decline in TomTom’s consumer business continues to more than offset the nearly 7% estimated average growth in automotive and licensing revenue. TomTom’s adjusted EBITDA margin could be at the high end of the 20%-25% range in 2019 and 2020. We estimate that the firm’s current enterprise value represents 1.2 times 2019 and 2020 sales, and 4.9 times adjusted EBITDA, which we view as appropriate given the declining consumer segment, foreseeable threat of Google and other firms to TomTom’s fastest-growing and now second-largest segment (automotive), in addition to lower overall adjusted EBITDA margin, excluding telematics. Our fair value estimate represents only slightly higher enterprise value multiples of 1.3 times sales and 5.6 times adjusted EBITDA of both years.