MDA was restructuring US ops to get security nod for DigitalGlobe acquisition

MDA was restructuring US ops to get security nod for DigitalGlobe acquisition

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So it’s official now. On Friday, as Canada’s MacDonald Dettwiler and Associates’ announced that it is set to acquire American imagery giant DigitalGlobe, in a call with investors and media, MDA CEO Howard Lance also spelt how his company had been working around the security and regulatory clearances around the deal for a year now.

Restructuring on since 2016

MDA, headquartered in Richmond, British Columbia, Canada, began a corporate reorganization exercise in 2016. This included the formation of SSL MDA Holdings, Inc. The newly formed entity is the US operating company of MDA, formed under the guidance and approval of the US Department of Defense (DoD). On January 26, 2017, SSL MDA Holdings announced the signing of a Security Control Agreement, allowing the company to more effectively pursue US government space and defense markets that require security clearances.  The goal of the US Access Plan is to expand MDA’s business with US government civilian, defense and intelligence agencies in space and geospatial programs.

The terms and conditions of the merger provide for MDA to pay a reverse termination fee of $150 million to DigitalGlobe if the deal is blocked by the Committee on Foreign Investment in the United States (CFIUS), or by any government agency.

MDA to acquire digitalglobe
Howard Lance was appointed MDA CEO in 2016 shortly after he joined the company. It would be interesting to note that Lance is an American citizen and had previously served as Chairman and CEO of US tech giant Harris Corporation from 2003 to 2011.

Lance, who was appointed MDA CEO in 2016 shortly after he joined the company, spelt out that MDA was already involved in mission-critical US government projects, including those of the DoD and NASA. “DigitalGlobe will operate as a stand-alone division under SSL MDA Holdings, in the same way as SSL and MDA’s Canadian businesses,” Lance announced during the call.

It would be interesting to note that Lance is an American citizen, and had previously served as Chairman and CEO of Harris Corporation from 2003 to 2011. Harris is an American technology company, defense contractor and IT services giant.

MDA acquired SSL, formerly known as Space Systems/Loral, LLC, a California-based satellite manufacturer, in 2012 for $875 million, turning itself into a global communications player and opening doors for it to begin subcontracting US space projects like those for on-orbit satellite servicing through the US Defense Advanced Research Projects Agency (DARPA). Since then it has been steadily boosting its US operations, particularly through the company’s “US Access Plan”.

Reiterating MDA’s commitment to its Canadian heritage, Lance explained that he has had detailed conversations with Canadian authorities to explain the logic behind this merger. “At the same time we have had a number of conversation with the US administration and our US government customers. Given this background, we are confident that we will meet all the security requirements to close this deal,” he added.

“This combination has the scale, resources and technology to serve the large and increasingly complex needs of government and commercial customers globally. By combining MDA and DigitalGlobe, we are significantly expanding our total addressable market by broadening both companies’ capabilities and facilitating future growth,” Lance said.

Given the security sensitivities around DigitalGlobe’s portfolio and its long-term commitments to US Department of Defense, it was but obvious that the US government would have a major say in the deal.

DigitalGlobe parent to be incorporated in US

Lance explained that once the deal was closed, which was expected within this calendar year, the combined company would continue to execute its US Access Plan strategy. This includes further reorganization of the combined entity’s corporate and operating structure to ensure that the ultimate parent of DigitalGlobe is incorporated in the US by the end of 2019, subject to customary approvals and government clearances.  Lance also announced that MDA will apply to list its shares on the New York Stock Exchange.

“The transaction is a major step forward in our previously announced US Access Plan. We are committed to serving the US government as a mission-critical partner with an expanded portfolio of end-to-end solutions,” he explained.

The US National Geospatial Agency (NGA) has priority access to 30-cm imagery from DigitalGlobe’s WorldView3. Further, DigitalGlobe’s core business is the 10-year EnhancedView contract with NGA that runs till August 2020. This means effectively means the combined entity not only has to ensure that DoD’s exclusivity, but also ensure that the long-term agreements of purchases aren’t affected adversely.

DigitalGlobe’s US govt dependency

Revenues from US government account for roughly 64% of DigitalGlobe’s revenues. According to its annual results announced on February 24, US government revenue for the year 2016 was $462.2 million, up 3%, against the total annual revenues of $725.4 million. The company said these increases were due to the impact of Radiant and better than expected revenue in its existing government services business.

The 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.

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

Diversification of portfolio

The acquisition now will provide both companies an opportunity to diversify their respective portfolios. As Lance said, the “announcement creates a new company that will lead the industry, offering space systems and imaging solutions from inception to execution, able to make design decisions with our customer’s needs in mind.”

MDA to acquire DigitalGlobe
Acquisition will reduce DigitalGlobe’s dependency on US govt and help it diversify its portfolio

It opens up newer areas for DigitalGlobe to enter newer commercial application areas, in addition to it taking advantage of MDA’s technology, used in satellites and ground stations, to enhance its imagery and analytics services.

MDA to acquire DigitalGlobe
For MDA, the acquisition will help broaden US business

For MDA, the acquisition of DigitalGlobe accelerates its previously announced US Access Plan to more effectively serve the US government space markets and customers and adding significant existing business with multiple US government agencies.

As previously pointed out, the merger will result in a conglomerate that can offer both Optical and Microwave satellite services. 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.

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