GeoEye Mulls Survival Options After Losing NGA EnhancedView Contract

   The EnhancedView program accounted for approximately 41 percent of GeoEye’s 2011 full-year revenue.

   GeoEye and rival DigitalGlobe both won contracts totaling $7 billion from the NGA to provide high-resolution satellite images under the EnhancedView project in 2010. DigitalGlobe’s EnhancedView contract was renewed earlier this month for a third year. The NGA allowed GeoEye to exercise an option that would pay the company $39.75 million in service revenues for the three-months ending November 2012, as well as a nine-month option providing $119.3 million, contingent on funding.

   Raymond James Analyst Chris Quilty said the loss of EnhancedView would make GeoEye an ironic potential takeover target as the company offered to buy DigitalGlobe for $792 million in May. DigitalGlobe rejected the offer, saying it was in a better position than GeoEye in avoiding the next round of government budget cuts. 

   “While the outlook for GeoEye appears grim, the company could yet emerge whole if the EnhancedView budget is fully-funded, or Congress intervenes to level the playing field between DigitalGlobe and GeoEye,” Quilty said in a June 25 report. “We believe the odds, however, are not in GeoEye’s favor.” 

   The NGA had been paying GeoEye $150 million per year since 2010 for GeoEye-1 imagery, and had agreed to a $184 million per year step-up once GeoEye-2 entered service in mid-2013. 

   Though Quilty said the NGA might be able to fully-fund the legacy GeoEye-1 commitment, he noted that the loss of the EnhancedView program leaves the GeoEye-2 satellite without a customer.

   “With construction costs of $270 million remaining on GeoEye-2, GeoEye should have no problems funding the completion of the satellite using a combination of cash-on-hand, cost share payments of $181 million and cash flow from operations of $127 million through the second quarter of 2013,” Quilty added. “That said, GeoEye could elect to delay the launch of GeoEye-2 until it achieves greater visibility on the EnhancedView contract and/or international government commitments.”

   JP Morgan Analyst Paul Coster said that with GeoEye unable to improve its $792 million bid to acquire DigitalGlobe, the purchase might still happen in the opposite direction. “DigitalGlobe might be positioned to acquire GeoEye under favorable terms if the latter loses NGA funding,” he said. “The EnhancedView program cuts would significantly lower GeoEye’s profitability next year, but will still be able to pay its 2013 bond interest payments if the nine-month extension is not exercised.”