DigitalGlobe and GeoEye agree to US$900m merger
DigitalGlobe is to acquire GeoEye just over two months after it strongly rejected the latter’s unsolicited takeover offer.
Having held potential merger discussions both privately and publically for more…
DigitalGlobe and GeoEye agree to US$900m merger
DigitalGlobe is to acquire GeoEye just over two months after it strongly rejected the latter’s unsolicited takeover offer.
Having held potential merger discussions both privately and publically for more than half a year, the boards of the two Earth observation operators have finally agreed to a definitive merger agreement under which the companies will combine in a stock and cash transaction worth approximately US$900m.
Under the terms of the transaction, GeoEye’s shareholders have the right to elect either 1.137 shares of DigitalGlobe common stock and US$4.10 per share in cash, 100% of the consideration in cash (equivalent to US$20.27) or 100% of the consideration in stock (1.425 shares of DigitalGlobe common stock), for each share of GeoEye stock they own.
However, the aggregate consideration amongst all shareholders must reflect the 1.137 shares and US4.10 in cash ratio. This equates to 25.4 million shares of DigitalGlobe stock and approximately US$92m in cash.
Based on the closing prices of DigitalGlobe and GeoEye as of 20 July 2012, the transaction offers a premium of 34% to GeoEye’s closing price of US$15.17 per share. The deal also represents a valuation multiple of around 5 times GeoEye’s EV / FY2011 EBITDA.
Upon completion of the transaction, which is expected to take place in Q4 2012 or Q1 2013, DigitalGlobe shareholders will own approximately 64% and GeoEye shareholders approximately 36% of the combined company, which is to be named DigitalGlobe and continue to trade on the NYSE under its DGI symbol.
The new DigitalGlobe’s board of directors will comprise six members from the current DigitalGlobe board and four from GeoEye. DigitalGlobe’s current president and chief executive Jeffrey Tarr will remain in those roles post-transaction, while GeoEye’s CEO Matt O’Connell will assist the management of the combined company in an advisory capacity.
Commenting on the transaction, O’Connell said: “We are excited to be joining forces with DigitalGlobe as we believe this transaction represents the best path forward for our shareowners, our customers, and ultimately, the taxpayer.
“With an impressive constellation of commercial earth imaging satellites and complementary services, the combined company will be well positioned to achieve efficient growth, expand our international reach and create value for all stakeholders.
“Given the stock component, our shareowners will have the opportunity to participate in the significant growth and value creation potential. I look forward to working closely with the management teams of both companies to support this transaction and establish the foundation for what will be a dynamic and enduring company.”
Both O’Connell and GeoEye’s largest shareholder hedge fund Cerberus Capital Management have agreed to vote in favour of the deal, as have the DigitalGlobe management and its largest shareholder Morgan Stanley Principal Investments.
Cerberus stated that it intends to continue its investment in the combined company and may purchase shares of DigitalGlobe in advance of the closing of the transaction. The hedge fund has also entered into a standstill agreement with DigitalGlobe in which its ownership in the new DigitalGlobe will be capped at 19.9%.
In a conference call regarding the transaction, DigitalGlobe’s CFO Yancey Spruill said: “Upon closing, Cerberus will receive approximately US$80m of newly issued DigitalGlobe convertible preferred stock, and US$11m in cash. On a pro forma basis, absent potential incremental purchases of DigitalGlobe shares prior to closing, Cerberus will own just over 11% of the combined company, based on their ownership in GeoEye today. Finally, Cerberus will also initially be represented on the combined board with one of the four GeoEye Board seats.”
In an research note, Raymond James analyst Chris Quilty said that he expected both shareholders to approve the deal and that it was likely that the merger was ‘pre-cleared’ with the Department of Defense, Director of National Intelligence and Justice Department.
Morgan Stanley and Barclays are acting as financial advisers to DigitalGlobe, with Skadden, Arps, Slate, Meagher & Flom its legal counsel. Goldman Sachs, Convergence Advisers and Stone Key Partners are serving as GeoEye’s financial advisers and Latham & Watkins and Kirkland & Ellis its legal advisers.
Financing the deal
In order to fund the acquisition, DigitalGlobe has secured a US$1.2bn fully committed financing from Morgan Stanley and Bank of Tokyo-Mitsubishi UFJ that will be used refinance the combined company’s outstanding debt. The company also increased its revolver by US$50m to US$150m.
Explaining the reasoning to analysts, Spruill said, “So we both have senior secured debt. They (GeoEye) have bonds, we have bank debt, so we have cross-collateralization issues and have to refinance one or both of the debt. We have chosen to refinance both at closing. We both have just over US$1bn dollars in debt and we’ll roughly keep the debt footprint outstanding at the same level.
“We expect, and we have been in communication with the rating agencies on this, that our rating will stay in line with where we are today. So we expect relatively similar cost to the Libor plus 450- 500 area in terms of the cost for the bank debt.
“We’ve chosen a bank debt structure because of the significant free cash flow in the transaction. We’ll also have an undrawn US$150m revolver to give the combined company incremental flexibility from a balance sheet perspective. Post-closing, we would be around three times debt-to-EBITDA and we will see fairly dramatic deleveraging as we start to realize the benefit of efficiencies that’s going to lead to free cash flow generation.”
A logical fit in austere times
Both companies have cited the stronger fiscal position the merger would result in given the currently proposed lower US government fiscal year 2013 EnhancedView funding plan.
Back in June, GeoEye was notified by the National Geospatial-Intelligence Agency (NGA) hat it had decided not to automatically renew its EnhancedView programme in September, because of “funding shortfalls”.
The companies stated that a combined business would ‘therefore have better revenue certainty, lower dependence on the US government as a source of revenue, a higher percentage of commercial and international revenue, and be well positioned for future growth.’
DigitalGlobe estimates that non-US government revenue would account for approximately 50% of total pro forma revenue, which is predicted to be around US$600m for 2012. The combined company would also have a contract backlog of more than US$3bn and US$400m of cash on hand.
As well as a reduced dependence on the US government, the satellite imaging operators pointed to the substantial synergies that are expected from the merger through lower cap ex spending and operational cost savings. The two companies plan to maintain a three-satellite constellation, down from the current five satellites. In addition, both WorldView-3 and GeoEye-2 are under construction and while DigitalGlobe is obligated top launch WorldView-3 in 2013-2014, the expected cancellation of GeoEye’s EnhancedView contract means that GeoEye-2 can now be held in reserve as a ground spare until 2016-2018.
Overall, Digital Globe anticipates synergy savings to be more than US$1.5bn through annual cap ex avoidance of between US$150 – US$200m, due to lower satellite cost requirements, and operational costs savings in the region of US$90m -US$120m a year.
