Garmin Bids for Tele Atlas

Updated from 7:38 a.m. EDT

Navigation devices maker Garmin ( GRMN) stunned investors Wednesday with an unsolicited 2.3 billion euro ($3.3 billion) bid for Dutch mapping company Tele Atlas, trumping a three-month old offer from rival TomTom.

News of the hostile bid and the prospects of a bidding war sent shares of Garmin sliding $9.73, or 8%, to $110.75 in recent trading and overshadowed the company's strong third-quarter results.

Garmin said it will offer $35.31 for a share of Tele Atlas, 15% higher than the $30.63 TomTom offered in July and a 48% premium to Tele Atlas' share price before TomTom's bid.

Garmin said it expects a counter-bid from its Netherlands-based rival TomTom.

Reik Read, an analyst with Robert W. Baird, took a dim view of the bid because of the possibility of a "bidding war as TomTom and Garmin have similar purchasing capability.

"And assuming Garmin wins, this is a difficult integration of a software mapping company, which is dissimilar to a hardware company such as Garmin in business model and culture," said Read. Robert Baird makes a market in Garmin shares and has an investment banking relationship with Garmin.

Garmin's aggressive move comes nearly a month after cellphone maker Nokia ( NOK) offered to buy digital mapmaker Navteq ( NVT) for $8.1 billion. Nokia's acquisition is expected to close in the first quarter of fiscal 2008.

Garmin certainly needs greater control over its mapping software database, and purchasing Tele Atlas would help the company. But with its counteroffer, Garmin may have raised the stakes too much, said Mike Ippoliti, research director for telematics and automotive for ABI Research.

"The key question now is what exactly will owning Tele Atlas solve for Garmin and is it part of a forward-looking strategy or just a reactionary move?" said Ippoliti.

Buying Tele Atlas would help Garmin offer better local search, 3D-mapping and real-time traffic flow data, said Kevin Rauckman, chief financial officer of Garmin.

"Garmin's vision for the digital map of the future includes expanded coverage and improved map quality," Rauckman told analysts on a conference call. "Garmin has attracted a large installed base of over 25 million users, and we intend to capitalize on this growing community and create real-time content using Tele Atlas maps combined with Garmin's connected devices as part of a larger mobile device network."

Meanwhile, Garmin disclosed that it has been steadily building up a stake in Tele Atlas and is expected to soon have a 5% position in the company.

Garmin said in its third-quarter report that net income rose to $193.5 million, up from $122.97 million a year ago.

Excluding the effect of foreign currency changes, the company reported earnings of 89 cents a share, up from 50 cents in the same quarter of 2006. Analysts polled by Thomson Financial were expecting earnings of 81 cents a share.

Revenue for the quarter rose 79% to $729 million from $408 million in the year-ago quarter. Analysts were expecting $683.17 million in revenue. Garmin said it sold 2.69 million units in the third quarter of 2007, up 119% from the same quarter of 2006, with the average selling price at $271 a unit, 7% below the second quarter.

Nearly two-thirds of the company's third-quarter revenue in its automobile segment came from what it called "lower price products" with mid-range and higher-priced products completing the mix.

Garmin reported better-than-expected gross margin in some segments -- a key concern for analysts and investors. Gross margin in its aviation division remained stable at 66% during the quarter. The outdoor and fitness division saw its gross margin decrease 52%.

The automobile division -- probably the most closely watched segment of the company's business -- posted a 43% gross margin, beating expectations, said Garmin.

"The primary reason for the strength of the gross margin in the segment is price compression was not as strong as earlier expected," said Rauckman. "We also experienced benefit from favorable product mix as personal navigation devices sold in the U.S. were greater than in Europe."

The company's automotive and mobile segment revenue increased 118% to $519 million in the quarter, while the aviation segment revenue increased 27% to $74 million.

The outdoor and fitness division reported a 24% increase in revenue to $88 million, and the marine division saw revenue rise 17% to $48 million.

Revenue from North America grew to $454 million from $265 million a year ago, while revenue from Europe rose 89% to $227 million from $120 million.

For fiscal 2007, Garmin raised its guidance and said it expects overall revenue to exceed $2.9 billion and earnings to exceed $3.40 a share, which falls within the range of Street expectations of revenue of $2.9 billion and EPS of $3.42 a share. Previously the company had said it expects revenue of $2.8 billion and earnings of $3.15 a share.

Growth in its automotive/mobile, aviation, marine and outdoor/fitness segments for the fiscal year is expected to be 90%, 30%, 20% and 10%, respectively.

Garmin expects to ship 10 million devices in 2007.

"We have increased our manufacturing facilities and have grown our inventories in preparation for holiday season," Dr. Min Kao, chairman and CEO of Garmin told analysts on a conference call. "We anticipate the enhanced product positioning, targeted advertising and the promotion activities will drive strong growth through the remainder of 2007."

But Garmin also warned investors that the company expects the decline in pricing and margins to intensify during the holiday season.

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