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MDA to buy DigitalGlobe; US DoD may play key role

Given security sensitivities around DG’s portfolio, it could be a tedious deal

First image of WorldView-4
First public image of DigitalGlobe‘s WorldView-4, taken on November 26, 2016 features the Yoyogi National Gymnasium in Shibuya, Tokyo.

Canada-based satellite company MacDonald Dettwiler & Associates (MDA) is said to be in advanced talks to buy US satellite major DigitalGlobe. The Wall Street Journal, which first published the news on Friday attributing it to unnamed sources, said the terms of the potential deal couldn’t be learned, but added that it was also possible that the talks could fall through before an agreement was reached, and another bidder could emerge.

People familiar with the matter told Geospatial World in case of a deal, given the security sensitivities around DigitalGlobe’s portfolio, the US Department of Defense (DoD) may be a key player in setting the terms of the acquisition while protecting long-term commitments and exclusivity of DigitalGlobe offerings to DoD.

DG scrip on Feb 17, 2017Given DigitalGlobe’s market value of $1.84 billion Friday afternoon, after a typical takeover premium the deal could be worth anywhere between $2 billion and $3 billion. Its scrip was up 18.24% on the New York Stock Exchange at a near three-year high of $35.90.

MDA scrip on Feb 17, 2017On the other hand, that the acquisition would be a very complicated one for MDA is obvious and was reflected the way its stock dipped 1.5% to touch an intra-day low of C$72.31 on the Toronto Stock Exchange.

While MDA has maintained total silence on the report, a statement from the DigitalGlobe to Geospatial World’s query was: “As a matter of policy, we do not comment on market rumors about our company.”

What would be interesting to note is there wasn’t an outright denial, thus indicating that there indeed is some amount of truth to the “rumors”. DigitalGlobe is known to have been sounding out a number of possible buyers in recent times.

MDA has more than 70 satellites used for consumer services such as television, satellite radio and broadband. It also provides surveillance and intelligence services to governments worldwide. The company had a market value of 2.7 billion Canadian dollars ($2 billion) as of Friday afternoon.

US DoD to play a key role

If the deal goes through, it would attract a tedious process of approvals. It may be mentioned that the US National Geospatial-Intelligence Agency (NGA) has priority access to 30-cm imagery from DigitalGlobe’s WorldView3. In such a situation, MDA would have to ensure that DoD’s exclusivity and long-term agreements of purchases aren’t affected adversely. This may be a real test for MDA given that it is a Canadian company and has to follow Canadian laws.

The US government accounts for roughly 66% of DigitalGlobe’s revenue, and majority of this comes from security agencies like the NGA or Defense Intelligence Agency. NGA is both a combat support agency, under the DoD, and an intelligence agency of the United States Intelligence Community, with the primary mission of collecting, analyzing, and distributing geospatial intelligence in support of national security.

While DigitalGlobe CEO Jeffrey Tarr had previously maintained that NGA’s new commercial strategy to work with small-satellite providers will not be a threat, the fact remains that its core business is the 10-year EnhancedView contract with NGA that runs till August 2020.

For the six months ending June 30, 2016, the EnhancedView contract accounted for $168.6 million in revenue. Total US government revenue for the period was $222.2 million. In 2016 Q3, DigitalGlobe had $181.8 million in revenue, a 4.9% increase from the year earlier, and $15 million in net income. Though it didn’t disclose the exact amount, revenue from US government rose 3.2% during that period. The company will announce its full year and Q4 results on February 27.

Because of NGA’s priority access to WorldView-3 imagery, DigitalGlobe’s 10 Direct-Access Program (DAP) nations have been unable to get adequate 30-cm imagery, which the company seeks to fix now with the launch of its WorldView-4 late last year.

Is DG running out of patience?

Some market observers say it could be a well-thought-out strategy by the DigitalGlobe board to put pressure on DoD to find an appropriate buyer within the US defense community. There have been rumours for at least two years now that it is eager for a sellout to any of the large defense contractors patronized by US DoD, such as Lockheed Martin or Harris. Unfortunately, neither have shown any interest.

“With the current US administration’s focus on ‘Americanisation’, it is highly unlikely that the government would okay acquisition of DG by a foreign company,” said one source on the condition of anonymity.

It is important to recall how back in 2012 GeoEye made a hostile bid for DigitalGlobe that valued the latter at over $790 million. It was well known that DoD was pushing for a consolidation, but DigitalGlobe wasn’t showing much interest. With GeoEye running out of fuel, it had to plunge itself in hostile mode, so as to seek attention of DoD. Finally, DigitalGlobe bought GeoEye for $900 million; but has been facing problems ever since, and now these talks with MDA could easily be to seek the attention of DoD for an emergency bailout.

Another important fact to be noted is the emergence of UrtheCast, which is again a Canadian company, and at some stage a possible integration of MDA, UrtheCast and DigitalGlobe could give the biggest advantage to Canada in terms of commercial imaging capability, raising a serious concern for DoD. In this scenario, it will be interesting to see how the US government reacts to this development.

What could the merger mean?

The merger between MDA and DigitalGlobe, if it comes through, will result in a conglomerate that can offer both Optical and Microwave satellite services, say geospatial industry experts. While such a wide range of satellites is operated by government entities like ISRO and ESA, it will be a first for a private company. Further, DigitalGlobe’s expertise in the application of Big Data Analytics to Optical satellite imagery can be of great benefit to MDA.

Last year, DigitalGlobe bought The Radiant Group, a geospatial-solutions company that has contracts with the National Reconnaissance Office, Defense Intelligence Agency and others in the US intelligence community to up its analytics arsenal.