DigitalGlobe Chief Executive Jeffrey Tarr. Credit: DigitalGlobe

PARIS — Earth observation imagery and services provider DigitalGlobe said Oct. 31 its planned merger with rival GeoEye would create a company generating $1.2 billion in annual revenue and $389 million in operating income by 2016.

Without the merger, DigitalGlobe said, its revenue in 2016 would be $814 million, with an operating income of $324 million.

In a prospectus sent to the two companies’ investors, DigitalGlobe says the scenario assumes that the GeoEye-2 satellite, now nearing completion, will be stored on the ground until 2017, when it would be launched to replace DigitalGlobe’s WorldView-1 satellite now in orbit.

As part of their due-diligence procedures preceding the merger agreement, DigitalGlobe and GeoEye plotted separate postmerger revenue scenarios that are included in the prospectus. The companies arrived at broadly similar revenue and profitability conclusions.

Shareholders of Longmont, Colo.-based DigitalGlobe and Herndon, Va.-based GeoEye will be asked to approve the merger which is more a DigitalGlobe purchase of its rival on Dec. 3. The companies’ boards of directors and several large shareholders have approved the deal, and license transfer formalities are under way with the U.S. Federal Communications Commission and the U.S. National Oceanic and Atmospheric Administration.

An antitrust review by the U.S. Department of Justice is taking a bit longer, and costing the companies slightly more, than they had planned. A second series of Justice Department questions has been received and will be answered in November, starting another 30-day review.

In an Oct. 31 conference call with investors, DigitalGlobe Chief Executive Jeffrey R. Tarr said the companies are still forecasting that the merger will clear all U.S. regulatory hurdles by late this year or early in the first quarter of 2013.

The cash and stock transaction will result in a company 64 percent owned by current DigitalGlobe shareholders and 36 percent by GeoEye shareholders.

The companies have said that by operating a single fleet of three satellites instead of four or five operated by the two of them separately, and by eliminating duplication of satellite tasking and image archiving and sharing other costs, they can achieve savings of $1.5 billion over several years even after accounting for the additional costs associated with the merger.

They currently expect to incur a combined $62.4 million in one-time transaction charges for legal and advisory fees as part of the merger.

One of the largest pieces of savings will come from forgoing the planned 2013 launch of GeoEye-2 by a Lockheed Martin Atlas 5 rocket. The satellite, under construction by Lockheed Martin Space Systems of Sunnyvale, Calif., would be placed in storage until 2017, when it would be launched to replace DigitalGlobe’s WorldView-1 satellite.

GeoEye officials have said a go/no-go decision on shipping GeoEye-2 to the launch site would need to be made by March 2013. The merger gives DigitalGlobe the right to call off the deal if the satellite is shipped or launched — a measure of the negative effect shipment and launch would have on the postmerger economies the companies expect to realize.

DigitalGlobe’s WorldView-3 high-resolution optical satellite, under construction by Ball Aerospace & Technologies Corp. of Boulder, Colo., would be launched as scheduled in mid-2014, also on an Atlas 5 rocket, under the postmerger scenario.

DigitalGlobe and GeoEye spent months circling each other and trying to control a merger scenario before it became clear that it was GeoEye’s contract with the U.S. National Geospatial-Intelligence Agency (NGA), and not DigitalGlobe’s, that would take the brunt of the budget cuts NGA was imposing on the ostensibly 10-year EnhancedView image purchase contract.

That decision threw the match in DigitalGlobe’s favor and resulted in the merger that was proposed in July.

EnhancedView was a $7.3 billion contract about evenly divided between the two companies. Given the expected cuts to the GeoEye piece, the two companies are now operating under the assumption that GeoEye receives no further service agreement payments from NGA after Nov. 30, and that GeoEye does not receive any further GeoEye-2 cost reimbursements from NGA.

The future revenue estimates, which DigitalGlobe officials insisted should not be viewed as formal company forecasts, assume that DigitalGlobe’s EnhancedView contract continues as planned. NGA has notified DigitalGlobe that its EnhancedView funding will remain intact for the second year of the 10-year duration, which ends in August 2013.

Under the EnhancedView terms, DigitalGlobe will receive annual payments from NGA totaling $250 million per year for the first four years, and then $300 million per year for the remaining six years.

EnhancedView payments are conditioned on the company’s meeting performance criteria and making capital investments that will increase the amount of imagery furnished to NGA.

In the conference call, DigitalGlobe Chief Financial Officer Yancey L. Spruill said the company in July deployed the last three of seven remote image reception facilities required under EnhancedView, a milestone that resulted in an immediate increase in NGA monthly payments.

The last big capital investment under EnhancedView will be WorldView-3’s launch in 2014.

The NGA contract gives the agency the right to order that the WorldView-2 satellite, which now operates at an altitude of 770 kilometers in polar orbit, be lowered to 496 kilometers to provide sharper imagery — but also a smaller field of view — starting in September 2013.

The NGA monthly payment increase was only part of the story the company delivered to investors in its third-quarter financial report, which like the merger prospectus was issued Oct. 31.

For the nine months ending Sept. 30, DigitalGlobe reported revenue of $296 million, up 22.4 percent over the same period a year ago. Operating income was $47 million, nearly quadruple the 2011 figure. Commercial revenue, where DigitalGlobe sees some of its best growth prospects in the coming years — all those maps for tablets, navigation devices and smartphones — was up 29.2 percent, to $65 million.

Growth occurred “in every revenue line and customer group,” Spruill said.



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Peter B. de Selding was the Paris Bureau Chief for SpaceNews.