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Sometimes it helps to follow the smart money.

On September 22, Stephen Feinberg's Cerberus Capital Management closed an $80 million investment in GeoEye’s preferred stock. Convertible into 2,688,172 common shares, at a conversion price of $29.76 per share, those shares equaled a 12.2% stake in the company.

Separately, before that closing date, Cerberus bought 1,173,000 common shares. It bought those shares before it completed the preferred-stock investment so it didn’t have to disclose how much it paid. With this purchase--revealed on September 28th-- Cerberus essentially owned the equivalent of 3,861,172 shares, or a 17.5% stake.[1]

Finally, Cerberus purchased another 770,000 shares of satellite imaging company GeoEye (NASDAQ:GEOY). In transactions spanning from September 28th to October 12th, Cerberus purchased $31.4 million worth of the company at an average cost of $40.78, pushing its total ownership to 6,631,172 shares –a 21% stake.[2]

So what exactly has the billionaire Feinberg going “all in,” particularly at a time when the stock is already richly priced at 25x earnings?

Something is brewing. The company is suddenly moving its headquarters to Herndon, to a corporate office within a mile of the Dulles International Airport. It’s adding 100 more jobs, a near 20% increase in its head count. Recent activities surrounding GeoEye suggest that insiders are preparing either for a buyout or a new threshold of commercial success, as the niche play of geospatial imaging goes global and ubiquitous.

The satellite imaging company, best known for its Google Maps imagery, certainly has seen its top-line gallop. Sales enjoy a five year growth rate of 54%, versus 8.95% for the defense industry as a whole. At a time when few companies saw robust top-line growth, GeoEye saw revenue jump 84% from fiscal 2008 to 2009.[3] Two quarters into fiscal 2010, TTM sales are $315 million, vis a vis $271 million for fiscal 2009.

Its recent quarter --ending June 30-- was solid. GeoEye saw an 11.4% year-over-year revenue increase and an operating income that was 30% of revenues. Its adjusted EBITDA margin was 52.3% for the quarter.

As GeoEye CEO Matthew O'Connell said in the conference call, "This is a great time to be in the space-imaging business."

Impressive growth is likely to continue. This summer GEOY received a $3.8 billion 10 year contract to provide imagery to the US military and its spy agencies. It was a momentous development for both GeoEye and its competitor DigiGlobe (NYSE:DGI), which also received a large contract. It signaled that the federal government would not be spending its money this decade expanding its own systems. It would be depending more on commercial players.

As Jeff Evanson, an industry analyst with Dougherty & Company LLC, made clear: “The federal government appears to have decided to stop dating the industry and marry it.”

Two important conclusions can be drawn from this contract. First: a duopoly has been established. With these two companies and their super-expensive satellites rolling up 3mm kilometers of imagery per day, a staggeringly high barrier of entry has been created for any new American outfit hoping to get into the field.

Second: the contract certainly fleshes out future revenue projections. Any new investments in precision-enhancement –read new satellites-- will have their market.

This brings us to the present moment. The stock has risen steadily since August and the federal contract is baked in the cake. What’s got Feinberg aggressively adding to his ownership stake at a cost above 40 bucks a share?

As you may remember, back in March, GeoEye entered into a financing deal with Cerberus Capital Management that provided the satellite imagery company with funds up to $215 million. This was to finance its next satellite –Geo Eye 2. The company had just submitted its bid for the Enhanced View contract and with US government less eager to fund more satellite construction, it hoped to convey a measure of self-sufficiency to the feds. Cerberus essentially helped GeoEye win the contract.

So Feinberg knows the company well; he has kicked the tires and seen “under the hood.” And Cerberus is undoubtedly involved in some advisory capacity for GeoEye’s “Next Act.”

What is that Next Act? It could be a buyout. GeoEye has long been on the radar of the big aerospace and defense companies. As a decade of military action in Iraq/Afghanistan winds down, it offers a foothold in a fast-growing market with a wide spectrum of clientele. Some companies mentioned are: L-3 Communications Holdings Inc (NYSE:LLL), Raytheon (NYSE:RTN), Honeywell (NYSE:HON), Lockheed (NYSE:LMT) and even Boeing (NYSE:BA). Lockheed Martin (LMT) has worked with the company for years, having designed and launched every GeoEye satellite since IKONOS in 1999.

Private equity has been active lately buying up the advisory businesses that many military contractors must shed under new Pentagon rules about conflict of interest. Northrop Grumman Corp (NYSE:NOC) recently sold its TASC Inc advisory business to Kohlberg Kravis Roberts (NYSE:KKR). Last week Lockheed said it would be selling its Enterprise Integration Group to private equity firm Veritas Capital.

Cerberus itself completed its purchase of Dynacorp, the governmental services provider, earlier this year. With 14,000 employees in the Middle East, the contractor is huge in vehicular maintenance, repair, and overhaul (MRO); police training and counter-narcotics operations; and support logistics.

So Feinberg might be looking at in-house synergies. A more integrated use of GeoEye imagery and geospatial metrics would obviously offer a clear benefit to the company’s operational efficiency, as well as its profile under the DoD’s new, rather stringent “Performance Based Logistics” strategy.[4]

Besides the “usual suspects” in the defense industry, another company comes up. Yes, Google Inc. (GOOG) is mentioned as a buyer, however unlikely. Both founders --Page and Brin—were at the September 2008 space launch of Geo-Eye 1. The company’s Google Earth project, its deep push into data mobility, even its recent forays into driverless transport and interstate energy all require precise geospatial data delivered on a massive scale. But the “Do no evil” company is likely to be gun-shy of the defense aspect of a GeoEye or a DigiGlobe.

Google will likely keep its distance, preferring to keep both companies in business and let them deal with the military and state-craft intrigue. Let’s not forget that both companies were spun off from the National Reconnaissance Office, which builds and operates U.S. spy satellites. Until 1992, the NRO itself was an official state secret. Today’s GeoEye is the proud product of fifty years of covert military investment and a happy “swords-to-plowshares” effort that accelerated in 2002 under CIA Director George Tenet.

Ultimately, though a buyout is possible, the more likely scenario is this: an impressive expansion into new commercial applications and international markets. Feinberg might be doubling down now before the November 8th earnings call shows how much traction the company is making on that front.

Remember: the third quarter ended September 30, around the time he got busy buying. It will be the first quarter to reflect the US contract dispensed this summer. So I imagine a healthy dollop of government sales. But that’s the old news: management will be expected to talk a lot about the future, its Next Act

Expect a discussion about big growth in the commercial and international markets. Euroconsult, which estimated the total market for satellite-based earth observation at $800 million in 2009, has predicted a compound growth rate of 16 percent through 2018. I see that as a conservative estimate.

The world is seeing a geospatial revolution. Governments worldwide are following the US and turning to courant satellite imagery over dated maps for policy decisions. Russia recently did this in an upper-level decision-making process concerning Siberian oil. Pakistan used the imagery to view road and bridge damage due to its terrible floods. Greece tracked down untaxed swimming pools. Satellites even being used to survey ship passage possibilities in the Artic Ocean’s Northwest Passage.

Traditional enterprise applications have just started to integrate geospatial imagery into their workflow. Oil exploration and forestry were early adapters, but expect to see a new “ubiquity” to geospatial data in other spheres of business. In the financial sector, new strategic uses are being made of the imagery to gauge Chinese inventory warehouse activity, count container ships, and even count cars in Walmart (NYSE:WMT) parking lots to assess year over year revenue. It’s become the new secret sauce, soon to be new pre-requisite.

On the commercial and international front, GeoEye has a leg up on its brother-competitor. In the first quarter of 2010, DigiGlobe reported 80% of its revenue was defense-related. That figure was 67% for GeoEye. It has investments in Beijing Earth Observation, Inc., Indian Remote Sensing satellites, Eastdawn Group (Japan), and CosmosSkymed (focused mostly on Europe).

With a new headquarters 3000 ft from an international airport, I see a sales force hitting the tarmac 24/7 and a company gaining even more market share globally.[5]

This fact is not lost on Stephen Feinberg.


[1] Special thanks to David Carey, Senior Writer at The Deal.

[2] Yahoo Finance

[3] Reuters.com

[4] Gerson Lehrman Group, "Cerberus Capital enters the DoD world..", September 29, 2010

[5] This new headquarters is also next door to Northrop Grumman and BAE Systems.

Disclosure: Author is long GEOY