UPDATE 3-GeoEye offers to buy DigitalGlobe for $792 mln

Fri May 4, 2012 10:07am EDT

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May 4 (Reuters) - Satellite imagery company GeoEye Inc offered to buy rival DigitalGlobe Inc for $792 million in cash and stock to counter potential revenue losses from U.S. defense budget cuts.

DigitalGlobe had rejected the $17-per-share proposal - a 26 percent premium to the stock's close on Thursday - GeoEye's Chief Executive Matt O'Connell said on a conference call with analysts.

The companies' shares have come under pressure in recent weeks amid reports that the U.S. government plans to halve or significantly scale back its expected procurement of $7.3 billion in digital imagery over the next decade.

"This proposal represents the most prudent course of action for both GeoEye and DigitalGlobe, given the continuing uncertainty in the market created by the U.S. government's budget review process for 2013 and beyond," O'Connell said.

Defense analyst Loren Thompson said consolidation in the commercial imagery sector would make sense, given the U.S. government's slackening demand for its products.

"Combining the two companies would allow significant cost savings at a time when the future demand outlook for medium-resolution overhead imagery is uncertain," said Thompson, chief operating officer of the Lexington Institute.

DigitalGlobe and GeoEye are the only commercial satellite imagery companies supplying to U.S. spy and military agencies.

GeoEye shares have lost 31 percent value in the last one year, while the DigitalGlobe stock has nearly halved in value.

The companies also supply imagery to location-based technologies such as Google Maps, and navigation device application makers such as Garmin Ltd and Nokia Oyj .

OFFER TERMS

Under the current proposal, DigitalGlobe shareholders will get $8.50 per share in cash and 0.3537 shares of GeoEye stock for each share held.

The two companies had been negotiating a possible deal for months and discussed a possible merger as well.

GeoEye cited a March 2 letter from DigitalGlobe that said a combined company would "enjoy material scale and scope benefits in addition to significant cost savings and would be well positioned to meet the needs of the U.S. government and other customers."

DigitalGlobe was not immediately available for comment. The Pentagon had no immediate comment.

GeoEye said it will consider restructuring the proposal to make it an all-cash offer, or to reduce the cash component.

Cerberus Capital Management, the company's major shareholder, is prepared to contribute substantial capital in support of the transaction, GeoEye said.

It said the transaction will not involve any undue delay and that it had already undertaken a preliminary review of antitrust and international competition issues.

GeoEye, which had cash and cash equivalents of $172.0 million as of March 31 and is valued at $547 million, is being advised by Goldman, Sachs & Company, Convergence Advisors LLC and Latham & Watkins LLP.

DigitalGlobe shares jumped 20 percent to $16.10 on Friday on the New York Stock Exchange.

GeoEye's shares rose 10 percent to $26.31 on the Nasdaq, but were later trading up 2 percent at $24.42.

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