GeoEye Proposes to Purchase DigitalGlobe

by Matt Ball on May 4, 2012

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. The companies have increasingly focused on the added value of their information, with forays into marine, agriculture, natural resources, and other services 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 military 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 no official word from DigitalGlobe yet on this $792 million offer, but it certainly looks attractive. There’s also the matter of SEC approval, which may hold some resistance due to the loss of competition in the marketplace.

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 and competition from 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, “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. What remains uncertain is the 2013 commitment that has been proposed in the President’s budget to fall from $540 million to $250 million.

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 on each company’s website through annual reports and quarterly earnings statements.

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. 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 competitive 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. The combined force of five satellites, with two on the way, would prove to be a powerful combination able to visit the same point on the planet three times per day. The two companies also have 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.

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