Orbimage-Space Imaging Merger Expected To Stabilize the Industry

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Orbimage plans to take full advantage of Space Imaging’s work force and facilities after it acquires its one-time rival in a long-awaited consolidation move that will reduce the number of U.S. players in the commercial satellite imaging market from three to two.

Matthew O’Connell, chief executive officer of Orbimage, said Space Imaging’s highly skilled workers, many of whom hold valuable security clearances, were one of the company’s more attractive assets. Orbimage will maintain Space Imaging’s facilities in Thornton, Colo., and might even procure the next-generation satellite that Space Imaging had been planning up until late last year, he said.

Orbimage Holdings Inc. of Dulles, Va., announced Sept. 16 it will purchase Space Imaging LLC of Thornton from parent companies Lockheed Martin and Raytheon for $58.5 million. The announcement ends speculation that had been swirling around Space Imaging since last September, when the company lost out to Orbimage in a competition for a $500 million defense contract that was considered vital to the future of both.

“Things have been screwy since this business started, and we finally now have a stable configuration of companies where the industry can evolve normally,” said industry analyst Edward Jurkevics of Chesapeake Analytics.

Orbimage will now go head-to-head with DigitalGlobe of Longmont, Colo., the remaining U.S. industry player.

O’Connell said the Space Imaging purchase will tip the balance of power slightly toward his company, and Jurkevics estimated the market split at 60-40 in Orbimage’s favor.

Chuck Herring, spokesman for DigitalGlobe, said his company is confident it will be able to hold its own . “DigitalGlobe believes this clears up a lot of questions about the future of the industry and the consolidation,” he said . “We feel very strong about our position going forward … we’ll be the first to launch our next-generation satellite and at that point, we’ll have the two highest-resolution satellites.”

DigitalGlobe’s existing QuickBird satellite can take pictures sharp enough to discern ground objects 0.61 meters across — the most detailed imagery available commercially — and the company plans to launch an even more capable satellite in 2006. The satellites operated by Orbimage and Space Imaging can take sharp enough images to distinguish features as small as 1-meter across. Orbimage also has a next-generation spacecraft under construction and slated for launch in 2007.

Space Imaging’s plans for a follow-on to its Ikonos satellite were dashed when the company failed to win one of two $500 million NextView imaging contracts awarded last year by the National Geospatial-Intelligence Agency. DigitalGlobe and Orbimage won the contracts and are using them to finance their new satellites.

“When the two NextView contracts were awarded, it was like musical chairs, and Space Imaging was left without a chair,” Jurkevics said . “It was imperative that it be acquired by one of the [other two companies].”

Industry sources said DigitalGlobe and at least one other company bid on Space Imaging before Orbimage eventually won out.

As a result of the sale, which O’Connell expects to close by the end of 2005, Orbimage receives all of Space Imaging’s assets, including its international network of regional affiliates. That network includes independently operated entities in Japan, Korea, the United Arab Emirates, Turkey, Germany and Thailand .

Some changes to that network may be in store once the deal closes, O’Connell said. “Some [affiliates] have some issues; we’ll decide if the existing contracts for all the existing affiliates are at present the best use of Ikonos time. If not, we may do a bit of reshuffling of the deck,” he said.

O’Connell said Orbimage does not intend to consolidate the operations of the combined company at a single facility. Ikonos will continue to be operated from Thornton, and Orbimage’s OrbView satellites from Dulles, he said, adding that there will be employee movement both ways between those sites.

“I don’t think there’s a practical need to fully integrate Ikonos,” O’Connell said. “There are talented people who know how to run that system.”

O’Connell said Orbimage’s top priority in terms of new space assets remains OrbView 5, which is expected to take pictures at resolutions as sharp as 0.41 meters. But he would not rule out the possibility of reviving Space Imaging’s dormant plans to launch an Ikonos 2 satellite, which likely would be built by Lockheed Martin Space Systems.

“Orbview 5 remains our first priority for a next-generation satellite,” O’Connell said. “But if we find the demand is strong enough, and we see a good business case for it … we would pursue it and we believe the resources would be there.”

O’Connell said there has been a “significant groundswell of interest” from the international community in seeing an Ikonos 2 because of some if the satellite’s technical attributes .

Orbimage does not expect the Space Imaging purchase to run into anti-trust issues. O’Connell said the National Geospatial-Intelligence Agency has signaled in the past that it did not intend to support three U.S. commercial satellite imaging companies. “Instead of three companies, none of which were doing all that well, you have two companies, which are more robust,” he said.

O’Connell said there are various ways the company might finance the transaction, including debt, equity and cash. He declined to be more specific.

“I think the price is good; I like it,” Jurkevics said of the $58.5 million purchase. “It really adds value to Orbimage in excess of what they paid.”

Space Imaging declined to answer specific questions about the deal. In a prepared statement, Space Imaging Chief Executive Robert Dalal said the merger will benefit the overall market. “Consolidation is a common occurrence in any new and growing industry, and it should be anticipated,” Dalal said. “Until the closing of the transaction, which may take several months because of regulatory approvals, we will stay committed to and focused on our customers.”