While nothing has been officially confirmed, industry observers are expecting Lockheed Marin and Raytheon Co. to sell off their Space Imaging remote sensing joint venture. The question that is still up in the air is whether or not one of its two competitors, DigitalGlobe or Orbimage, will acquire the Colorado- based company or if a third party will rise and keep three remote sensing companies operating in the United States.

“Space Imaging is internally reviewing all of its strategic options,” Mark Brender, vice president of corporate communications for Space Imaging, told Satellite News. “Nothing has been decided at this point in time. The [Ikonos] satellite is expected to be operational until the 2008 time frame. Our executive management and owners are reviewing various options.”

The expectation that a sale is imminent, with a transaction that could be announced as early as this summer, comes as no surprise to industry observers in light of Space Imaging’s failing in two attempts to secure a $500 million NextView contract from the National Geospatial Imaging Agency (NGA).

A sale “has been in the works for a long time,” J. Armand Musey, a partner with the boutique investment banking firm NearEarth told Satellite News. “When [Space Imaging] lost the government contract, it made it hard to justify building a next-generation satellite. So a sale is probably very high on the list of options they are considering.”

The Leading Candidates

Observers are looking at DigitalGlobe and Orbimage as the likely candidates to be first in line when Space Imaging is put up for sale.

“Every way I trend this, they are definitely two strong candidates” for acquiring Space Imaging, Ed Jurkevics, a principal with remote sensing consulting firm Chesapeake Analytics told Satellite News. “Not only that, if one of them were to [acquire] Space Imaging for an attractive price, it would give it an advantage over the other. So from that perspective, good ol’ competitiveness should affect the outcome here.”

Musey concurred that Space Imaging would likely be acquired by another remote sensing company, but he suggested that the list of potential buyers would not be limited to its U.S.-based competitors. There are “some international remote sensing operators that might have an interest as well,” Musey said.

Musey suggested that the most valuable part of any potential sale would be Space Imaging’s backlog of orders. “If one of the other one meter operators were to buy it, they potentially could convert a lot of the backlog into their existing backlog,” Musey said. Space Imaging also has “a significant amount of value-added processing capability, which could be attractive as well to Orbimage or DigitalGlobe or even some of the international operators.”

Jurkevics added, “I think Mitsubishi is one of the shareholders and they would like to put together a group to ensure the continued operations of Space Imaging.”

Ikonos Issues

While the backlog and other value- added assets could boost the value of Space Imaging in the eyes of potential buyers, the company’s main asset, the Ikonos remote sensing satellite, could drive down the sale price, particularly in light of the blink that the spacecraft experienced late last month.

“On Jan. 29, the satellite experienced an anomaly,” Brender said. “After a thorough analysis, all systems checked out fine and the Ikonos satellite is back to full mission operations. We are imaging now. We took an image on Feb. 4. We are back at full operations and all the imagery meets our most stringent quality standards.”

Brender dismissed the notion that the blink could have a potential effect a possible sale of the company, stating, “All satellites at some point in time have anomalies.” He said the recent anomaly resulted in no recurring problems and it has not shortened the life of the satellite.

However, Jurkevics said that the blink in the satellite’s operations “has shaken everybody. That could make a potential investor very nervous.”

Can Two Companies Survive?

With the sale talk swirling, questions linger as to whether the sale of Space Imaging could be followed by more consolidation in the remote sensing market.

Jurkevics said that there is room in the market for at least two companies and suggested that Space Imaging could actually survive under certain conditions if someone other than DigitalGlobe or Orbimage bought it.

“[The Ikonos] satellite has a life that expires in 2008, so [a buyer] would have to raise money for a successor satellite. And that is a chore without a contract from NGA to justify that financial investment. That is what makes it difficult.”

Assuming a suitor made the investment for a replacement satellite, that company would rely on four primary markets: U.S. military and intelligence markets not linked to the NGA contracts, like ClearView and other alike facilities; on foreign ground station revenues from licensing fees, which are about half government and half foreign military raised; on the U.S. civilian government for sales; and on other commercial revenue streams, Jurkevics said.

However, targeting those markets specifically might not be enough to justify the expense related to building and launching a new satellite. “The fact that Space Imaging may be having trouble getting financing for that follow-on bird may indicate that the numbers are not a slam-dunk without the NGA contract,” Jurkevics said. He noted that in the past there have been “a lot of optimistic outlooks throughout the last ten year, over what the commercial market revenues might be that never have been realized. I think that people are pretty sober in judging the revenue potential these days.”

And while Space Imaging may be experiencing its own financial difficulties, Jurkevics offered an optimistic look at the remote sensing market for both DigitalGlobe and Orbimage.

“Overall the U.S. government has committed more than $1 billion to this market,” Jurkevics noted. “The president signed policy promising for it to buy, for directing civilian agencies to buy from these guys.” He added that the industry players are realistic about the markets and they are making the right moves. “They are not going after markets that don’t exist anymore. Everybody really understands what the opportunity set is. The revenues are flowing.”

Jurkevics said that it is ironic that Space Imaging is experiencing difficulty because “it has never been better for a privatized remote sensing market. This is the heyday of it, but ironically there are only two seats at the table. This is not bad news, it is just that there are two seats. It is what NGA has determined as the number of companies they want with NGA contracts.”

Musey was not as optimistic that there is room for even two companies. “The question is this: is there room for two or is the number really one?” Musey said. “The government wants to make sure there is at least one. I think [a big enough market for] two is just going to depend on how fast they can develop the commercial market. They have to start making some progress there. It has been slow in coming.”

–Gregory Twachtman (Ed Jurkevics, Chesapeake Analytics, 703/525-6730; J. Armand Musey, NearEarth, 646/452-9931; Mark Brender, Space Imaging, 703/558-0309)