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Analysts Weigh in on GeoEye Takeover Rumors

By | July 28, 2011

      [Satellite News 07-28-11] GeoEye’s stocks are surging based on rumors that were published July 27 from various financial analysis firms that the imagery solutions provider hired Goldman Sachs to explore a possible acquisition sale to potential suitors such as Lockheed Martin, Harris Corp., EADS Astrium and Northrop Grumman.

          Some satellite market analysts, however, are not buying into the hype. Motley Fool Insider Analyst Brian Pacampara remains skeptical of a GeoEye buyout, but would not go so far to call it impossible. “I wouldn’t read too much into the rumor, but when you couple GeoEye’s potent prospects with its poor year-to-date stock price performance, the company seems like an inexpensive source of growth for one of the aerospace and defense giants,” Pacampara said in a statement.
          Raymond James Analyst Chris Quilty believes that the evidence supporting the rumors is vague, but indicative of a potential move. “The report did not make clear whether GeoEye’s actions were undertaken on management’s initiative or were the result of an unsolicited offer. Although management was unwilling to confirm or deny the news report, we believe the rumor has some merit from the perspective that GeoEye recently acquired a more activist investor and that the mentioned buyers are all eagerly seeking growth-oriented acquisitions to offset the likelihood of flat-to-declining demand in their core Defense market.”
          Quilty hinted to comments made in January by Astrium CEO Francois Auque that his company was hunting for Earth observation service companies based in the United States. Another hint on the validity of the rumors is that in the same month, GeoEye hired Dean Edmundson as its vice president of business development. Edmundson previously served as senior director of global business development for Primavera, where he helped develop a deal with Oracle resulting in its acquisition of Primavera.
          GeoEye’s most valuable asset is its contracted work under the U.S. National Geospatial-Intelligence Agency’s (NGA) EnhancedView program, including its Web Hosting Service (WHS). The NGA contract helped GeoEye increase its 2010 revenues by 22 percent from 2009 to $330.3 million. According to GeoEye, the fact that the company was able to expand the services it already provided to the U.S. Department of Defense to the NGA in return for a $337 million contribution to the construction costs of its next satellite allowed the company to increase its 2011 full-year estimates.
          “The EnhancedView Web Hosting Service is the next step in our commitment to providing multi-source products, services and dissemination capabilities to help the NGA deliver online, on-demand geospatial intelligence,” GeoEye Government Programs Senior Director Chris Incardona said in a statement.
           GeoEye’s 2011 first quarter revenues grew 7.8 percent to $86.6 million — on par with market consensus forecasts of $87.9 million. While GeoEye’s adjusted EBITDA remained flat at $43.8 million compared with the same period in 2010, the results were 5.8 percent above analysts’ projections of $41.4 million. GeoEye’s imagery segment beat analysts’ estimates by 2.2 percent. Quilty said the balance of the company’s upside performance came from international production, which could help drive the value of the company up if it is sold.

          “We base our price target on the assumption that GeoEye can trade at near-equivalent multiples to the FSS sector due to the company’s superior organic growth characteristics. While there are no good precedent transactions that we can point to in the EO sector, we remain confident that our valuation thesis still holds water and could represent the low-end of valuation outcomes should a full-blown auction take place,” said Quilty.    

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