TomTom to buy map supplier Tele Atlas

GPS manufacturer moves beyond hardware, and shares rise 9 percent with announcement of cash offer for map maker.
Written by Reuters , Contributor
TomTom, the world's biggest maker of car navigation devices, plans to buy its main map supplier, Tele Atlas, for 1.8 billion euros ($2.5 billion) to improve the digital maps used by millions of drivers.

By buying one of the industry's main suppliers of digital maps, TomTom is moving beyond hardware where double-digit profit margins are expected to decline in line with other consumer electronics makers, analysts said.

TomTom said on Monday it intended to make a cash offer of 21.25 euros per share for Tele Atlas, which also supplies online mapping Web sites such as Google Maps, as well as mobile phone maker Nokia.

The offer is supported by Tele Atlas and represents a 32 percent premium over the map maker's average share price in the last three months, the companies said. It values the equity of Tele Atlas, which has a net cash position, at 2 billion euros.

Shares in TomTom, which has sold more than 10 million of the navigation devices that perch on a car dashboard or windshield, were up 9 percent at 44.66 euros at 7:42 a.m. PST, while Tele Atlas rose 30.3 percent to 21.56 euros, above the offer price.

The news also sent shares in Tele Atlas rival Navteq, the only other company to offer comprehensive digital maps and main supplier to TomTom's main competitor Garmin, up by more than 15 percent to $55.80.

Analysts ruled out a counterbid for Tele Atlas by Navteq because it would effectively create a monopoly for digital maps of the United States and Europe, but analysts said companies like Microsoft, Google or even Nokia could be interested.

"Holy Grail" of digital maps
TomTom and Tele Atlas said they planned to tap into TomTom's user base to get feedback on where maps were out of date and gather statistical information on traffic flows to create new features such as daily map updates and predictions for traffic jams.

TomTom Chief Executive Harold Goddijn told a news conference the company was already receiving 16,000 error reports per month from its users.

"The best maps in the future will be produced by companies that have direct access to huge communities of users," Tele Atlas CEO Alain De Taeye said. "We're striving for the holy grail of digital mapping."

Tele Atlas becomes more profitable as revenue increases due to its fixed costs, which could balance out the likely long-term decline in TomTom's profit margins, Rabo Securities analyst Frits de Vries said.

Tele Atlas, which will continue to supply other manufacturers, however, could lose some of its clients, particularly those companies that compete directly with TomTom in the market for portable devices, analysts said.

Makers of built-in navigation systems as well as mobile phone manufacturers--areas in which TomTom has little presence--could be attracted by the new features, Petercam analyst Eric de Graaf said in a note.

"We also believe that a price war between Navteq and Tele Atlas has become less likely, as the biggest prize, TomTom, can no longer be persuaded to move to Navteq," De Graaf said.

TomTom will take on 1.3 billion to 1.5 billion euros of debt to fund the acquisition, Chief Financial Officer Marina Wyatt said, adding the deal was expected to contribute to earnings, adjusted for noncash items, within 12 months from closing.

The formal offer is expected in October, and the deal is expected to close by the end of the year.

TomTom also announced quarterly results early and said it sold 1.8 million portable navigation devices in the second quarter, above the average forecast of 1.69 million devices given in a Reuters poll of 10 analysts.

Sales rose 29 percent from the first quarter to 380 million euros. Net profit increased to 68 million euros from 44 million in the first quarter, above the average forecast of 50 million.

TomTom maintained its 2007 sales forecast of 1.6 billion to 1.8 billion euros and said it expects to sell between 8 million to 9 million devices this year.

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