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WASHINGTON, May 6 (Reuters) - Satellite imagery company DigitalGlobe Inc on Sunday rejected a $17-a-share cash and stock takeover offer from rival GeoEye Inc, saying the hostile bid substantially undervalued the company and its financial prospects.
"Consistent with its fiduciary duties and in consultation with its independent financial and legal advisers, the DigitalGlobe Board of Directors reviewed GeoEye's unsolicited acquisition proposal and unanimously determined that it substantially undervalues the company," it said in a statement.
DigitalGlobe said the takeover offer also did "not adequately recognize DigitalGlobe's superior track record of financial and operating performance as well as its constellation's greater capabilities."
GeoEye announced the takeover offer on Friday, saying it decided to press ahead after merger talks between the two companies broke down. GeoEye Chief Executive Matt O'Connell said the company was also willing to restructure its offer, which called for DigitalGlobe shareholders to receive $8.50 in cash, and 0.3537 shares of GeoEye for each share held.
DigitalGlobe offered a different account, disclosing a series of negotiations between the companies since February 2012 in which each side has sought to retain control of a combined company. It called GeoEye's account of events "materially misleading and incomplete."
DigitalGlobe said it had rejected previous unsolicited takeover bids, but countered with its own proposal to take over GeoEye in a transaction in which DigitalGlobe's stockholders would own approximately 60 percent of the combined company, and GeoEye stockholders would own about 40 percent.
DigitalGlobe said it halted talks on that proposal after concluding that the U.S. government's budget cuts would be more favorable for DigitalGlobe than GeoEye, but revived it again after Friday's takeover bid from GeoEye -- only to see GeoEye reject it again.
"Given GeoEye's rejection of that proposal, DigitalGlobe terminated discussions and will await the government reaching its budget decision regarding EnhancedView," the company said, referring to a $7.3 billion program by the National Geospatial-Intelligence Agency to buy satellite imagery from both companies.
U.S. defense officials have said that program will be curtailed sharply beginning in fiscal year 2013; some accounts project a halving of the orders over the next decade. However, the budget cuts must still be approved by Congress.
DigitalGlobe said it would reconsider whether to revive its own takeover bid for GeoEye when further details were available about the size of future government imagery orders.
DigitalGlobe Chief Executive Jeffrey Tarr said his company had "consistently demonstrated superior operating performance compared to GeoEye, including the stronger relative performance on the EnhancedView program. He said he believed the most recent GeoEye offer was triggered by concern about its prospects in competing for future U.S. imagery orders.
DigitalGlobe operates three high-resolution satellites, while GeoEye has two satellites on orbit.
GeoEye officials say they believe DigitalGlobe may offer more quantity, but its satellites provide higher-quality imagery to the U.S. government.
In a letter to GeoEye rejecting its takeover offer, DigitalGlobe said GeoEye had suffered "repeated, large holdbacks" against its agreement with the government, which could indicate "significant shortfalls in performance against NGA's requirements."
DigitalGlobe also said its "dramatically higher organic growth" as evidenced by its first quarter revenue growth rate of 12 percent, compared to only 3 percent for GeoEye.
Reporting By Andrea Shalal-Esa; Editing by Maureen Bavdek