GeoEye Makes Bid for DigitalGlobe After Merger Negotiations Collapse

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UPDATED at 12:52 p.m. EDT

PARIS — Earth observation imagery and services company GeoEye’s surprise May 4 announcement of a bid to acquire rival DigitalGlobe came after “a few months” of negotiations between the two companies on a merger and has received no response from DigitalGlobe, GeoEye Chief Executive Matthew O’Connell said.

Once the merger talks collapsed, GeoEye put its acquisition offer on the table but has heard nothing from DigitalGlobe management since then, O’Connell said in a May 4 conference call with investors.

“We were kind of puzzled as to the slowdown in discussions,” O’Connell said. “I’m not sure what their issues are. I’m sure people will be asking them. We look forward to further discussions, and it’s time the shareholders of both companies were aware of the discussions.”

Later on May 4, DigitalGlobe issued a statement confirming its receipt of GeoEye’s unsolicited proposal.

“DigitalGlobe’s board of directors, consistent with its fiduciary duties and in consultation with its independent financial and legal advisors, will carefully review and consider the proposal and pursue the course of action that is in the best interests of DigitalGlobe and its stockholders,” the statement said. “DigitalGlobe stockholders are advised to take no action at this time pending the review of the proposal by the company’s board.”

The GeoEye offer to DigitalGlobe shareholders is valued at $793 million, or $17 per share, half in cash and half in GeoEye stock. O’Connell said GeoEye had agreed to allow DigitalGlobe shareholders the option of taking their payment all in stock, or all in cash.

The offer has no time limit, O’Connell said. GeoEye said that a price of $17 per DigitalGlobe share represents a 26 percent premium over where DigitalGlobe stock stood on May 3.

News of the offer was a surprise, but market speculation in recent months has been that in the current U.S. government budget environment, it would be difficult for both GeoEye and DigitalGlobe to survive. The speculation was along the lines of which company would acquire the other.

Both depend on the U.S. government for more than half their revenue. The two are dividing, in about equal portions, a 10-year, $7.3 billion contract with the U.S. National Geospatial-Intelligence Agency (NGA) called EnhancedView. EnhancedView is structured as a one-year contract followed by nine one-year renewal options.

U.S. government officials in recent months have said the pressure on the U.S. Defense Department to reduce spending was likely to affect EnhancedView, with large cuts starting in fiscal year 2013, which begins Oct. 1.

The classified nature of parts of the EnhancedView contract and the secretive nature of recent U.S. government reviews of the contract have fueled market rumors that EnhancedView’s budget would be savaged.

In that climate, investor fear has driven the price of both companies’ stock down sharply and thus created an opening for the kind of bid GeoEye announced May 4.

In the conference call, Herndon, Va.-based GeoEye said that NGA recently informed the company that GeoEye’s share of EnhancedView for fiscal year 2012 would not be reduced. Longmont, Colo.-based DigitalGlobe was given the same news April 30.

DigitalGlobe’s shares, which had already risen by 8 percent on May 2 following the company’s announcement about the NGA contract, rose 22 percent, to $16.50 per share, in New York Stock Exchange trading on May 4 following the GeoEye announcement.

Government and industry officials had said earlier this year that NGA had been ordered to make a $50 million cut to EnhancedView for fiscal year 2012. It was unclear whether that decision was subsequently rescinded or if NGA found $50 million in savings outside of EnhancedView.

DigitalGlobe and GeoEye officials said during their respective May 1 and May 4 conference calls that they had no idea what cuts, if any, would be made to EnhancedView in the fiscal year 2013 budget.

O’Connell said GeoEye and DigitalGlobe entered their merger talks “a few months ago” not because they feared any specific cuts to EnhancedView, but because combining the two companies makes so much sense.

“Competitors tend to over-build each other,” O’Connell said. A combined company could “rationalize the [satellite] constellation. Basically we can take one satellite out of the equation.”

GeoEye and DigitalGlobe are both building expensive new satellites to add to their fleets in 2013. Both have elected to use high-cost satellite and launch service providers, and each satellite is expected to cost more than $800 million, including launch.

O’Connell said GeoEye had informed NGA of the acquisition attempt, and that the U.S. agency indicated it would remain neutral given that it has no specific mandate to judge antitrust issues.

“They will be an ‘interested bystander,’ in their words, but they won’t put their thumb on the scales one way or the other,” O’Connell said.

The U.S. Justice Department does have that mandate, but O’Connell said an antitrust review would almost certainly conclude that satellite Earth observation providers operate in a global market, not a national one, and that there is plenty of competition.

On the financial side, O’Connell said GeoEye has been working with its biggest shareholder, Cerberus Capital Management LP, to line up the financing needed to pay for DigitalGlobe. In a May 4 statement, GeoEye said Cerberus affiliates “are prepared to contribute substantial capital in support of our proposed transaction.”

“That will not be a problem,” O’Connell said of the task of raising the necessary cash.

GeoEye has hired Goldman Sachs and Convergence Advisors LLC, and law firm Latham & Watkins LLP, as advisers on the proposed acquisition.

DigitalGlobe said it has retained the services of the law firm Skadden, Arps, Slate, Meagher & Flom LLP, with Morgan Stanley and Barclays serving as DigitalGlobe’s financial advisers.

 

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