PARIS — The near-term future for U.S. commercial satellite imagery companies GeoEye and DigitalGlobe until recently looked “so bright, you gotta wear shades,” as GeoEye Chief Executive Matthew M. O’Connell put it during one investor presentation.
Both companies now may find night-vision glasses more appropriate as their biggest customer, the U.S. government, hints at major cuts to the 10-year, $7.3 billion program that once put the two firms on the sunny side of the street.
These threats, which have never been publicly quantified by the U.S. government, have driven the companies’ stock prices down by between 35 and 40 percent in the past 12 months. The two companies are about evenly dividing the total value of the program, dubbed EnhancedView.
Several months ago the two competitors began negotiating a possible merger, which would offer obvious synergies and possible cost savings to the government.
Herndon, Va.-based GeoEye on May 4 publicly offered to buy DigitalGlobe for $17 per share, a $793 million cash-and-stock transaction that represented a 26 percent premium to where Longmont, Colo.-based DigitalGlobe’s stock was trading the day before.
DigitalGlobe rejected the offer and, directly contradicting what O’Connell had told shareholders May 4, on May 6 said it had previously offered to purchase GeoEye.
DigitalGlobe accused GeoEye of a desperation effort to salvage its business in advance of the major cuts expected in the EnhancedView program, managed by the U.S. National Geospatial-Intelligence Agency (NGA).
DigitalGlobe has told investors that its greater in-orbit image-gathering capacity and bigger color-image library have already made it NGA’s preferred supplier of imagery under EnhancedView.
NGA has made no announcement about EnhancedView’s future. Government and industry officials had said EnhancedView spending would be reduced by $50 million for the fiscal year ending in September. But GeoEye and DigitalGlobe both said they were informed by NGA in early May that their EnhancedView payments for 2012 would not be modified.
Neither company professes to know what will happen in 2013, the year when the more serious cuts are expected. A government study of the value of commercial satellite imagery has been kept classified, as has the EnhancedView portion of the fiscal year 2013 budget proposal by the administration of U.S. President Barack Obama.
With the lack of clarity about EnhancedView’s future likely to continue for several months, investors in both companies are weighing their options. One DigitalGlobe institutional investor, speaking privately, said a valuation showed DigitalGlobe was worth $22 per share even if EnhancedView is cut by 40 percent.
Another institutional investor, appearing at a May 15 conference in Boston organized by J.P. Morgan, bluntly asked DigitalGlobe Chief Financial Officer Yancey L. Spruill why shareholders should not tender their stock to GeoEye if GeoEye raises its bid to $20 or $21 a share.
Spruill declined to answer, preferring to focus on the company’s first-quarter performance.
Spruill also detailed a recent modification of the EnhancedView contract as it applies to DigitalGlobe.
In addition to requiring more ground stations to speed delivery of imagery, DigitalGlobe’sEnhancedView contract had featured a requirement that the company lower the altitude of its WorldView-2 satellite, which is in orbit, to sharpen its ground sampling distance to 41 centimeters from the current 46 centimeters.
A further orbit-lowering was foreseen starting in late 2013, after DigitalGlobe’s WorldView-3 satellite is launched.
Lowering the orbit would carry a cost in terms of the daily image harvest, however, and Spruill said NGA has now decided it would prefer a larger number of images rather than the sharper resolution.
The orbit-lowering also would have penalized DigitalGlobe’s sales to non-U.S. government customers. Under current U.S. policy, DigitalGlobe can provide imagery at resolutions as sharp as 25 centimeters, meaning that it can detect objects of that diameter and larger. But for non-U.S. government customers, the resolution limit is 50 centimeters unless a special waiver is granted.
DigitalGlobe and GeoEye have been increasing their revenue from international customers, a trend that likely will continue if EnhancedView is cut.
GeoEye said international customers accounted for a record 26 percent of its revenue for the three months ending March 31.
GeoEye’s focus now, beyond building support for EnhancedView, is on the GeoEye-2 satellite set for launch in early 2013. The company expects the satellite to cost about $835 million including launch and insurance.
As part of EnhancedView, GeoEye and NGA entered into a cost-sharing arrangement for GeoEye-2. NGA has agreed to pay up to $337 million in GeoEye-2 costs.
Of that sum, $111 million is due once GeoEye-2 is ready for integration and testing. Prime contractor Lockheed Martin Space Systems of Sunnyvale, Calif., recently announced it had passed this milestone.
O’Connell said that whatever the future holds for EnhancedView, GeoEye expects to receive that $111 million payment by September. Another $70 million has been set aside by NGA to help pay for GeoEye-2, and this second payment is expected by September 2013, once the satellite has been checked out in orbit and deemed operational by NGA.
In a May 4 filing with the U.S. Securities and Exchange Commission, GeoEye said it foresees “continued uncertainty” with respect to whether it will receive the remaining $156 million in GeoEye-2 cost-sharing that was agreed to in the EnhancedView contract.
