Remote Sensing Finally Found Stability?
By Edward A. Jurkevics, Chesapeake
Analytics Corp. (www.chesanal.com),
Earth Imaging Journal (www.eijournal.com)
Commercial high-resolution satellite remote sensing
attained an important industry milestone with the September 2005
announcement that ORBIMAGE would acquire Space Imaging’s assets. This
right-sizing consolidation will afford investors, customers and employees
alike a more certain, stable future as it allows the industry to evolve
along a more “normal” path.
The deal, in which ORBIMAGE will acquire most of
Space Imaging’s assets, is expected to close at year-end, pending
regulatory approval. The $58.5 million price tag looks attractive, and if
Space Imaging’s IKONOS satellite reaches its life expectancy into 2008,
the transaction is likely to generate free cash flow well in excess of the
purchase cost. In addition to being the largest awardee from the National
Geospatial-Intelligence Agency (NGA) ClearView program, Space Imaging has
more than a dozen valuable international groundstation contracts drawing
annual access fees, and these contracts should novate to ORBIMAGE.
ORBIMAGE CEO Matt O’Connell already stated his
intention to maintain significant operations in ORBIMAGE’s
, and Space Imaging’s
, locations. Look for business development and administrative functions to
migrate east, while technical operations gravitate westward. Additionally,
ORBIMAGE is likely to keep its presence in
, where it maintains a value-added services group that directly supports
NGA’s mapping needs. But plain old business sense will lead O’Connell
to integrate the organizations to reduce duplication and drive the bottom
NGA Was the Catalyst
Under the leadership of NGA’s director, retired Air
Force Lt. Gen. James R. Clapper, NGA tipped the industry’s hand when it
decided to award two—and only two—NextView contracts for the
construction and launch of nextgeneration commercial imaging satellites.
DigitalGlobe received the first award in 2003, and ORBIMAGE secured the
second in 2004. Despite its industryleading position at the time, Space
Imaging’s chances to receive a NextView award waned when its primary
financiers, Lockheed Martin and Raytheon, announced as early as 2003 that
they would make no further investments in the company, then walked away
from NextView negotiations in 2004.
Economic models of this capitalintensive industry
indicate a stability scenario with two owners operating a constellation of
five or six high-resolution satellites. Upon the launch of the two
NextView satellites, this stability point will be achieved. With NGA
acting as the anchor-tenant, look for ORBIMAGE and DigitalGlobe to have
the scale, profitability and access to capital required to maintain a
long-term, multisatellite fleet.
The View from Wall Street
New York-based L-3 Communications (NYSE:
), headed by Frank Lanza, reportedly was interested in acquiring Space
Imaging, but the company’s ardor cooled when Space Imaging didn’t win
a NextView contract. Space Imaging investor Mitsubishi also had interest,
but the loss of an important imagery supply contract with the Japanese
Defense Agency took it out of the running. In the end, DigitalGlobe and
ORBIMAGE were the only serious bidders for the company.
Post announcement, ORBIMAGE stock (OTC: ORBM.PK) has
been hovering around the $12 range. The company reported sales revenues of
$36.4 million in the 12-month period ending
June 30, 2005
. Expect the combined entity to post 2006 revenues in the $150 million
ORBIMAGE has increasingly used debt financing for its
NextView construction capital, including a $155 million debt round this
year, providing leverage for its stockholders. As NextView risk-milestones
are counted down and NGA data-purchase revenues grow nearer, ORBIMAGE’s
valuation will rise and will be reflected in its closely held and lightly
With NGA on board, Wall Street views the sector
favorably. Morgan Stanley continues to take an active role in financing
DigitalGlobe, which forayed to the capital markets to raise its costshare
portion to build its NextView satellite, now dubbed WorldView.
O’Connell, formerly of Wall Street investment firm
Crest Advisors, maintains good relations with the array of investment
funds that hold ORBIMAGE’s debt and equity instruments. These fund
managers, shrewd with a healthy dose of skepticism, support O’Connell,
and many continue to up their holdings as the company raises additional
tranches of capital. This shareholder support and O’Connell’s
canniness gave ORBIMAGE a key advantage in the Space Imaging bidding,
which was conducted by Bank of America.
As the dust settles and the industry enters a
“normal” mode, the onus now falls upon the DigitalGlobe and ORBIMAGE
management teams to execute, execute, execute. The combined ORBIMAGE-Space
Imaging entity will have a near-term market share advantage on
DigitalGlobe. However, DigitalGlobe’s WorldView satellite is scheduled
to launch and produce revenues before ORBIMAGE’s OrbView-5.
The long-term balance of power between the two
competitors will depend on scrupulous execution.