It has been a saga that has played out first in private and then in public, but the on-off merger of satellite imaging operators DigitalGlobe and GeoEye is finally close to an end. The board and majority shareholders of GeoEye have agreed to a cash and…
It has been a saga that has played out first in private and then in public, but the on-off merger of satellite imaging operators DigitalGlobe and GeoEye is finally close to an end.
The board and majority shareholders of GeoEye have agreed to a cash and share offer from rival DigitalGlobe that will see the latter’s shareholders own 64%, and GeoEye’s investors 36%, in the combined company.
The management of both companies extolled the virtues of the merger, pointing to the compelling fit, significant synergies and economies of scale that would result. They were also quick to highlight the substantial savings to the US government and taxpayers that the deal would bring, because of the consolidation of their EnhancedView contracts.
And it is these contracts that have been central not only to the development and continued prosperity of both companies but also as a catalyst to the merger itself.
The austerity drive by the US government has led to it seeking to push back on the future costs of the National Geospatial-Intelligence Agency’s EnhancedView programme. Back in mid-2010, the NGA awarded ten-year contracts to both DigitalGlobe and GeoEye worth US$3.55bn and US$3.8bn, respectively, and the government has been seeking to cancel a significant portion of these.
The question therefore arose, would both companies lose out on a substantial chunk of future income or would one retain its healthy position at the expense of the other.
As the White House sought to get the cuts through Congress, the uncertainty prompted the two remote sensing specialists to hold private discussions over a potential merger.
Over the past few months, it has become apparent that DigitalGlobe felt far more confident that if the programme was rationalised they would be victorious. To that end, when GeoEye made public its unsolicited takeover offer in May, DigitalGlobe reacted fiercely, rebuking the offer and arguing that it was made in desperation. The company even revealed that it had made its own private offer to buy GeoEye but retracted it as it awaited a favourable outcome in the government’s EnhancedView decision.
For its part, GeoEye thought such an outcome unlikely and that it would continue to receive the funding. Its belief, though, was dented in June when the NGA notified the company that it had decided not to automatically renew its EnhancedView contract.
With no assurances over future funding, GeoEye was left in a precarious position and DigitalGlobe returned with a new offer that provided it a more secure future.
However, some industry observers have questioned whether GeoEye was perhaps too hasty in agreeing to the deal. One told SatelliteFinance: “The two companies, by agreeing to merge now, may have short changed their argument for greater EnhancedView funding. While the administration has been seeking to cut it, Congress has pushed back and the Senate Armed Services Committee has been particularly anti any cuts to funding. By agreeing to merge today, they have effectively killed their lobbying potential.”
The merger could also have long term impacts for the NGA. While in the short term the government will benefit from cost savings, they will now have to deal with a monopoly in earth observation.
Chris Quilty, an equity analyst at Raymond James, commented that he had never seen a previous example of the US government effectively forcing a managed duopoly into a merger. He questioned whether this reduction in competition will lead to an increase in costs for the state in the long run.
One outcome is certain, that the combined company will be less reliant on the US government for its revenues and will instead seek to further tap the commercial market. This industry is still in its infancy but is growing rapidly, with Euroconsult projecting that it will grow at a 15% CAGR over the next decade.
So a merger that sprung out of government austerity may well result in a new wave of commercial applications – something the satellite sector has always excelled in.
