Tom Tom + Tele Atlas: Perfect Match

If there is ever a perfect marriage, this could be it. Tom Tom’s (AMS: TOM2) planned acquisition of Tele Atlas (AMS: TA) is perfect in more senses than one. For one thing, both are Dutch companies, with synergistic businesses, and a merger integration will be dramatically easier based on that reason alone. But of course, the real reason is their business synergy.

Tom Tom is one of the world’s largest GPS navigation system providers. TomTom’s annual revenue grew from €8 million in 2002 to €1,364 million in 2006. During this period annual net profit increased from €1 million to €222 million for 2006. 2007 Second Quarter results are as follows:

* Revenue of €380 million, up 29% sequentially and up 37% year on year
* Portable navigation device (PND) volume of 1.8 million, up 36% sequentially and up 118% year on year
* Gross margin of 45%, up 5 points sequentially and up 2 points year on year
* Operating margin of 25%, up 6 points sequentially and up 2 points year on year
* Net profit of €68 million, up 56% sequentially and up 81% year on year
* Fully diluted EPS of €0.58, up 56% sequentially and up 81% year on year
* Net cash flow from operating activities of €72 million

Tele Atlas, also a Dutch company founded in 1984, sells digital maps and dynamic content for navigation and location-based services, including personal and in-car navigation systems. Among others it supplies data to Google Maps and MapQuest that in turn provide information in a wide range of Internet based web applications. Its maps provide coverage of 21.3 million kilometers of roadway in 64 countries.

In my article on Navteq, I’ve discussed how 70% of the total cost of GPS device needed to run GPS service is on account of the receiver chip, an essential piece of hardware. On the flip side, though, this chip is commodity with low entry barrier, whereas the GIS content service has very high entry barrier. Both Navteq (NYSE: NVT) and Tele Atlas are GIS data providers, having spent years understanding and cataloging the world’s roads, locations, and landmarks.

Now, Tom Tom’s business as the world’s largest navigation system maker is an excellent channel for Tele Atlas’ GIS content service, and Tom Tom is already one of their largest customers. Tele Atlas, on the other hand, gives Tom Tom a great high-barrier position in a business that its competitors are fast replicating. It would diversify their revenues within the core expertise area.

Tom Tom’s acquisition of Tele Atlas, the former the latter’s largest client, is therefore a natural complement for each other’s businesses, assuming that this will not prevent Tele Atlas from also providing data services to other global GPS and Internet players.

Google, for example, is investing hundreds of millions of dollars in its cell phone project, and cell phone makers like Nokia are contemplating feature-rich handsets that include Location Based Services, there is no doubt that the markets for digital maps and LBS content services on both fixed and portable devices are set to explode in the near future.

Tom Tom offers to pay €21.25 per share of Tele Atlas in cash in a likely €2 billion deal, although last week’s surge in TA’s stock price may drive up the price of the deal.

Tele Atlas, however, has continued its loss-making spell, reporting a second quarter net loss of €1.2 million (US$1.6 million). The business for the second quarter though has been robust – revenue up from €64 million in first quarter to €72.8 million in Q2 making its second quarter core profit more than double that of Q1.

2008 onwards, the company hopes that revenues will grow by more than 20% every year for several years, with adjusted core earnings rising by about 50% of incremental revenue. In its current year’s forecast, the revenue is pegged at €315 million, accounting for adjusted EBITDA of about €65 million and operating profit (EBIT) of around €3 million.

Ever since the merger announcement, Tele Atlas stock has been recording new highs on AMS (up from €17.40 a share on Jul 20 to €21.69 on Jul 23). In the last few days though there is a flattish trend with a commensurate drop in trading volumes.

Tele Atlas’ largest competitor Navteq’s sterling quarterly performance last week and news of the Tom Tom – Tele Atlas merger have forced the market to re-rate the GPS/GIS stocks. Both Navteq and Tele Atlas were scaling 52-week highs last week.