Cerberus Bet Hits Escape Velocity via GeoEye Merger

Cerberus Bet Hits Escape Velocity via GeoEye Merger

By Pete Gallo

Absolute Return

September 4, 2012

How different the world can look in a few years! When Stephen Feinberg’s Cerberus Capital Management first took an interest in Herndon, Virginia–based satellite imaging company GeoEye in 2010, the company was poised to fly higher, thanks to multibillion dollar funding promised by federal agencies, including the U.S. Department of Homeland Security.

GeoEye’s stock, which traded at roughly $28.50 at the start of 2010, had spiked to above $40 per share by the start of 2011. That’s perhaps no surprise, given that the company had anticipated splitting $7.5 billion in slated government projects over a 10-year span with its rival DigitalGlobe. The Longmont, Colorado–based satellite imaging specialist pioneered (and continues to provide) some of the technical undergirding of Google’s popular mapping and satellite services used by every day Internet users and motorists worldwide.

Feinberg’s Cerberus was quick to spot the opportunity and became a major shareholder. Securities and Exchange Commission records show that by the start of the final quarter of 2010, Cerberus and its affiliate funds owned 1.8 million shares of GeoEye. SEC filings also show that GeoEye management credits Cerberus with providing the very financing that allowed the company to win its successful bid for government contracts via the National Geospatial-Intelligence Agency’s EnhancedView program. Cerberus also helped appoint retired U.S. Air Force General Michael Carns to the company’s board as a risk manager. In the wake of that, the hedge fund’s investment would grow to an even larger 2.8 million– share stake by the start of 2012, making Cerberus by far the largest investor in the company.

It was an apparent home run. What could go wrong with a bet on a company that was one of only two major providers of commercial satellite imagery for the U.S. government, with long-term commitments seemingly locked down?

Everything, it turned out. In early 2012, GeoEye learned that defense and government contracts would likely be drastically cut by a suddenly cost-conscious Congress. Contracts would not be immediately renewed, and others would be delayed, perhaps indefinitely.

That news sent GeoEye shares plunging on the Nasdaq to a low of $14.24 as of June 10. The decline was perhaps especially hard to swallow, given that revenues had grown in the second quarter and operating profits had risen by double digits to $22.1 million more than a year prior.

While investors, including Cerberus, were surely not amused, what followed took a somewhat slapstick tone as the management teams at GeoEye and DigitalGlobe briefly sparred publicly about who would acquire whom. It was clear both could not survive at their current girths with future revenues poised to drop.

Here Feinberg and the Cerberus investment team deserve kudos for their rapid decision making aimed not just at salvaging their endangered investment in GeoEye, but turning it into a net win that might provide Cerberus investors with long-term returns.

As GeoEye’s largest shareholder (with a 20-plus percent stake in the firm), Cerberus played a pivotal role in what happened next, according to July 22 filings: Cerberus backed a buy out with a voting agreement with DigitalGlobe.

On August 6, GeoEye officially agreed to be acquired by DigitalGlobe in a $900 million deal. GeoEye shareholders would be paid $20.27 per share in cash and common stock. The offer represented a substantial premium of 33.6 percent above GeoEye’s closing price of $15.17 in its previous trading session.

For Cerberus, the August merger deal boosted the value of its position from $42.5 million to $56.8 million. But that’s not to say it’s a pure ex it. SEC filings suggest Cerberus will likely hold on to its new shares in DigitalGlobe once the merger is completed, which is expected to happen by no later than the first quarter of 2013.

And why not? DigitalGlobe is now the sole provider of commercial satellite and geospatial tech services for several government agencies, and even if future federal funding remains uncertain, it counts a cashflush Google as a key client, to which it provides vital commercial mapping services for consumers.

Cerberus has agreed to a so-called stand-still agreement with DigitalGlobe, which prevents the hedge fund from making investments in affiliates or other firms that might create a conflict of interest prior to the close of the transaction, based on filings.

Still, immediately following the transaction, Cerberus will shift from being the largest shareholder in GeoEye to one of DigitalGlobe’s biggest investors. And as a distressed ex pert, Cerberus will be well positioned to continue its sector bet that began with its opportunistic Big Brother bet on GeoEye.

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