GeoEye (NASDAQ:GEOY) recently made an unsolicited offer for DigitalGlobe (NYSE:DGI) for $17 a share, with a mix of about 50% cash and 50% stock. The synergies are undeniable between two companies that share so many similarities and operate in a very specific niche.
In response, DigitalGlobe claims that the offer substantially undervalues the company. I'm inclined to agree, but with the one caveat that it only undervalues the company if any combination of the two firms occurs. DigitalGlobe's stance that the offer was "hostile" is also extremely interesting and somewhat disturbing.
One of the problems with DigitalGlobe's claim is that its shares have not only have risen more than GeoEye's after the announcement, but they have now fallen more than GeoEye's since the rejection -- leaving one to believe that the market does not share the same views of DigitalGlobe's management team that the offer undervalued the company. I have a feeling that if GeoEye were to make a higher offer, it will only be priced about 5% higher than the current offer.
The other problem with DigitalGlobe is that it has no strong-arm insiders to challenge management. Conversely, GeoEye's management looks to be making the offer as a result of some pressure from Cerberus Capital's Stephen Feinberg, who clearly still owns a huge chunk of the company. I've calculated an intrinsic value for GeoEye in the high $30s before, and a combination of the two firms should lead to some multiple expansion as well with a larger, more defensible overall business.
Looking at valuations at the current price levels, enterprise value to book value for DigitalGlobe stands at about 1.38 times vs. 1.13 times for GeoEye. GeoEye's offer priced DigitalGlobe at 1.55 times.
If 1.55 times is not fair to DigitalGlobe, I'd recommend that DigitalGlobe line up a capital partner and take out GeoEye at the same valuation, which would value GeoEye at $32-plus. Although Feinberg may have issue with that valuation, given that the average cost basis for his shares look to come in at a figure in the $30s, it still adds incremental value due to his convertibles being in the money at prices above $30 a share.
Finally, it would also theoretically be easier for DigitalGlobe to consummate GeoEye. The market is pricing its equity value at a premium to GeoEye's already, giving DigitalGlobe a cheaper source of capital than GeoEye's shares, which are not as richly priced.
Disclosure: I am long GEOY.