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Canada Snaps Up U.S. Space Star

By Rich Smith - Feb 28, 2017 at 7:54AM

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Investors are in a riot over the deal, but why?

DigitalGlobe (DGI) closed out a modestly successful year on something of a down note Friday, reporting a net loss for its fiscal fourth quarter 2016. The loss -- $9.3 million -- was primarily due to a $35.7 million charge to earnings, which DigitalGlobe was forced to record after refinancing its debt. Whatever the reason, though, the Q4 loss cut deeply into the profit DigitalGlobe would have earned for the year without it, limiting earnings growth to just 13.7% for the year.

Not that anyone cares about that. DigitalGlobe is getting bought out, and pretty soon, any quarterly earnings disappointments it is announcing will become somebody else's problem.

Bright star rising above horizon.

Canada is buying DigitalGlobe, and a new satellite star arises. Image source: Getty Images.

Friday's big news

That was the real news from last week: DigitalGlobe's decision to sell itself, lock, stock, and barrel, to Canadian acquirer MacDonald, Dettwiler & Associates.

As DigitalGlobe explained in a separate press release, it has now signed a "definitive merger agreement, pursuant to which MDA will acquire DigitalGlobe for US$35.00 per share in a combination of cash and stock." That works out to a purchase price of $2.4 billion for the company as a whole. MDA will also take on DigitalGlobe's $1.2 billion in net debt, resulting in a total enterprise value of $3.6 billion on the transaction.

Merger math

Is this a good price, or a bad one? That depends on how you look at it. With DigitalGlobe's full-year results in hand, we can see that MDA's $35-per-share offer works out to a valuation of 3.3 times sales that MDA is paying, or more than 90 times earnings. That actually sounds quite generous.

For that matter, valued on cash profits, the transaction values DigitalGlobe stock at about 21.8 times free cash flow. While not as generous-sounding, even this smaller number seems more than an adequate price to pay for a stock like DigitalGlobe. After all, analysts on S&P Global Market Intelligence predict that on its own and unacquired, DigitalGlobe would struggle to grow at more than high-single-digit rates over the next five years.

Stock market reaction

Nonetheless, investors were quick to pan the news, selling off DigitalGlobe stock until, by close of trading, it sold for just $31.25 per share -- down 8.2% for the day, and nearly 11% below MDA's offer price. So why are people so upset?

Clearly, it wasn't DigitalGlobe's earnings report that caused the sell-off. As I already explained, aside from the charge necessitated by DigitalGlobe's rolling over its debt, the results were actually not bad. And in any case, DigitalGlobe's financial performance will soon be MDA's problem to worry about -- not shareholders'.

So why did the stock sell off? Perhaps it was because rumors of DigitalGlobe's impending sale had been circulating for days, but those rumors posited a much higher sales price -- $3 billion before accounting for the net debt (or $4.2 billion with the debt). When it turned out that DigitalGlobe was selling itself for 14% below the most optimistic sales price that had been discussed -- well, that might help to explain why the stock promptly plummeted 8%.

To which I can only say: Count your blessings, and quit your grumbling, DigitalGlobe shareholders. Your stock's business wasn't exactly growing like wildfire solo, and it did just report a loss, after all. Perhaps you were hoping for a richer buyout price, but wishes aren't fishes -- and the buyout price management negotiated seems more than fair. 

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