May 08, 2012

GeoEye Proposes to Purchase DigitalGlobe

Estimated Article Reading Time: 6 min.

The mergers and acquisitions within the geospatial technology space are white hot right now, with news today that GeoEye has approached DigitalGlobe in order to acquire and combine companies. The result would be the world’s largest commercial high-resolution satellite company, with streamlined operations that would ensure viability in the face of deep federal cuts.

The mergers and acquisitions within the geospatial technology space are white hot right now, with news today that GeoEye has approached DigitalGlobe in order to acquire and combine companies. The result would be the world’s largest commercial high-resolution satellite company, with streamlined operations that would ensure viability in the face of deep federal cuts.

In addition to high-resolution satellite assets, the combined companies would also align on analytical services for specific markets. The companies have increasingly focused on the value add of their information, with forays into marine, agriculture, natural resources, and other markets in order to balance the military investment, which has proven to be unreliable of late.

Matt O’Connell, chief executive officer and president of GeoEye, said, “This proposal delivers exceptional value for the combatant commanders, national decision makers, civil users and disaster relief workers, who have a critical need for unclassified commercial imagery. It also provides benefits for the taxpayer. It offers our Government a way to get the information it needs while still reducing its funding obligations. The synergies in the combination will also benefit the shareholders of both companies.”

O’Connell continued, “In the face of significant pressure on the U.S. defense budget and intensifying international competition, a combined company will be better positioned to provide the U.S. government with the time-sensitive geospatial intelligence that is needed to support its mission in a very cost-effective manner during these fiscally conservative times. The government is looking to its providers for innovative solutions, and we believe this is the best option to achieve that.”

The move makes a great deal of sense in face of the ending of current conflicts that have spurred such high imagery demand, and with newer defense surveillance satellites that have added a great deal of imaging capacity. For long-term growth of the commercial satellite industry, one strong global player with deep analytical services, could greatly improve the entire industry’s outlook. The energy spent in direct competition could then be applied toward extending the full potential of a fleet of sensors that provide the most accurate real-time picture of our world.

The proposed transaction would give DigitalGlobe shareholders $17.00 per share in total consideration, payable $8.50 per share in cash and $8.50 in GeoEye stock, or 0.3537 shares of GeoEye stock for each share of DigitalGlobe stock. This price represents a 26% premium to DigitalGlobe’s closing share price on May 3, 2012. The proposal is structured to provide DigitalGlobe shareholders with the opportunity to participate in the dynamic future growth of the combined company.

There’s now official word from DigitalGlobe that they have rejected this $792 million offer, stating that it undervalues their company, and revealing that they had proposed to buy GeoEye, retaining 60% of the combined value of the company. It’s clear that the gloves are off now, and that the two major U.S. high-resolution imagery vendors will be battling each other for dominance. Hard to say if this will end in a proxy fight, but the benefits of a merger, and these public discussions, seem to have momentum. With stockholder value at play, ultimately, the investor outlook wins. It’s doubtful that the U.S. federal court would stand any resistance due to the loss of competition in the marketplace, given the strong international competition.

This proactive move, with correspondence between company presidents over the past few months, focuses on the value to the U.S. Government and taxpayer, as well as to the commercial benefits, and the heightened capacities of international commercial satellite vendors. With an acknowledgement to an “uncertain political and fiscal climate,” GeoEye’s CEO Matt O’Connnell, in a letter to DigitalGlobe CEO Jeffrey Tarr, states that, “Given this uncertain political and fiscal climate, we believe it is in our mutual interest to provide our customers with creative solutions to problems rather than passively speculate on one or another outcome.”

The past few months of speculation have certainly been trying for both companies, whose stock prices have fluctuated widely as federal budget figures have been made public. Both companies had press releases this week of their first quarter performance that also affirmed that they will each receive full government support for the 2012 budget year, which amount to $111 million for GeoEye, and $250 million for DigitalGlobe. Both companies also show projected strong growth in their earnings statements.

The openness of these public companies provides a wealth of detail regarding their performance to date, the growth of particular market segments, the diversity of their customer base, their hardware and network capacity, their investments in research and development, and their various service offerings. There’s a great deal of insight to be gleaned from the investor relations pages through earnings reports and quarterly earnings statements on each company’s website.

Some highlights from the companies include:

  • the creation of an Analysis Center at DigitalGlobe that focuses on rapid response to world crisis events, such as political unrest and natural disasters
  • the enhancement of DigitalGlobe’s ground station capacity that greatly speeds the time from collection to delivery, with just hours in between
  • the creation of GeoEye’s eyeQ software-as-a-service platform to provide seamless integration of imagery with other spatial information
  • GeoEye’s expanding Marine Services group that provides both fish-finding and oceanic data and services

There is also the matter of the planned launch of GeoEye-2 in the first half of 2013, and the launch of DigitalGlobe’s WorldView-3 satellite in mid-2014. Both satellites are being developed as part of a public/private partnership that is the Enhanced View program. WorldView-3 is slated to have 0.31 meter resolution, eight-band mulitspectral imagery, and eight-band short-wave infrared (SWIR) imagery. GeoEye-2 will have a 0.25 meter resolution, the highest resolution commercially available, and with this third satellite GeoEye gains a daily revisit capacity. Combined, it appears that daily coverage would exceed the ability to image the same spot on the ground three times per day. With current federal restrictions on the commercial sale of imagery to 0.5 meter resolutions, the companies can’t fully capitalize on resolution, which makes the number of visits compelling from a global competition standpoint.

DigitalGlobe has three satellites currently in orbit with QuickBird, WorldView-1, and WorldView-2 that combined visit the same point on the ground globally twice per day. GeoEye has IKONOS, which launched in 2009, and GeoEye-1 with the highest resolution available at .041 meter panchromatic and 1.65-meter multispectral imagery. The combined force of five satellites, with two on the way, would prove to be a powerful combination, with complimentary sensors thanks to the move on behalf of both companies to diversify their satellite capabilities against one another.

Commercial satellite imagery is big business, with GeoEye projecting revenues for 2012 from $355 million to $375 million, and DigitalGlobe projecting 14% growth for 2012 that would amount to more than $385 million. A combined company with yearly revenues of more than $700 million, and with considerably reduced overhead, would certainly be an attractive investment. I’m eager to see what all the stock market analysts make of this merger.

Source V1