TEXT-S&P puts DigitalGlobe 'BB' rating on watch negative
Overview -- U.S. satellite imagery provider DigitalGlobe plans to acquire competitor GeoEye Inc. in a stock and cash transaction valued at approximately $900 million. -- We are placing our rating on DigitalGlobe on CreditWatch with negative implications, given the heightened leverage associated with the transaction. -- Within the next six to eight weeks, we plan to assess the overall business risk profile of the combined company and time frame for it to achieve improvement in credit metrics. -- On completion of the transaction, we would withdraw all the ratings on GeoEye, since DigitalGlobe expects to repay all debt held at GeoEye. Rating Action On July 24, 2012, Standard & Poor's Rating Services placed its ratings on Longmont, Colo.-based DigitalGlobe Inc., including the 'BB' corporate credit rating, on CreditWatch with negative implications. Rationale The CreditWatch listing reflects the potential for higher leverage following the acquisition of GeoEye Inc., which the companies expect to complete by the first quarter of 2013, subject to regulatory and shareholder approvals. DigitalGlobe plans to refinance GeoEye's debt in the weeks leading up to the acquisition closing. It will also likely issue preferred shares to Cerberus, which would receive 50% debt treatment under our adjustments. Our base-case scenario also incorporates the elimination of revenues from GeoEye's National Geospatial-Intelligence Agency (NGA) service-level agreement (SLA). However, we expect DigitalGlobe to continue to benefit from revenues from its own SLA with the NGA, and from the increased presence in the commercial imagery processing and analytic services markets provided by GeoEye. We also believe management's targeted cost synergies are largely attainable, although we still expect leverage and funds from operations to debt to be elevated for the 'BB' rating in 2013, at above 4x and below 20%, respectively. We could therefore revise our financial risk profile to "aggressive" from "significant," especially if we determine that improvement prospects could be delayed or impaired by a potential drop in business from U.S. government agencies, which are likely to comprise about 50% of total 2013 pro forma revenues. CreditWatch Within the next six to eight weeks, we plan to assess the overall business risk profile of the combined company and the time frame for it to achieve improvement in credit metrics. At that time, we will either affirm the ratings and remove them from CreditWatch, or leave them on CreditWatch, and indicate that we will lower them at completion of the transaction, which is subject to numerous regulatory approvals. Related Criteria And Research -- U.S. Telecom And Cable Companies' Maturities Are Manageable, But Lower-Rated Issuers Face Some Liquidity Challenges, July 23, 2012 -- U.S. Telecom And Cable Companies, Strongest To Weakest, July 13, 2012 -- U.S. Telecom And Cable Ratings Should Be Stable Overall During Weak Economic Recovery, July 13, 2012 -- A Matter of Policy: U.S. Telecom Companies Maintain High Dividend Payouts, But For How Long?, May 30, 2012 -- A Matter of Policy: U.S. Cable And Satellite-TV Companies Ratchet Up Shareholder Payouts, May 16, 2012 -- Top 10 Investor Questions: U.S. Telecom and Cable Industries, May 10, 2012 -- Assessing The Four-Notch Rating Gap Between The Two U.S. Direct-To-Home Satellite Video Operators, May 9, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Ratings List Ratings Placed On CreditWatch To From DigitalGlobe Inc. Corporate Credit Rating BB/Watch Neg/-- BB/Negative/-- Senior Secured BB+/Watch Neg BB+ Recovery Rating 2 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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