* DigitalGlobe says it offered to buy GeoEye
* Analyst sees combined company as stronger
* U.S. government budget cuts seen driving consolidation (Adds details, analyst comment, byline)
By Andrea Shalal-Esa
WASHINGTON, May 6 (Reuters) - Satellite imagery company DigitalGlobe Inc o n S unday rejected a $792 million 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, whose market capitalization is about 38 percent greater than GeoEye's, said the offer also did not adequately recognize DigitalGlobe's "superior track record of financial and operating performance" and the greater capabilities of the three imagery-collecting satellites it has in orbit. GeoEye has two such satellites in orbit.
Sunday's announcement was the latest twist in tense behind-the-scenes negotiations that have been under way between the two companies since February amid reports of a huge drop in U.S. government funding for commercial satellite imagery.
GeoEye went public on Friday when it announced its bid for DigitalGlobe. It said a combined company could unleash sizeable synergies and improved value for shareholders.
The company had no immediate comment on the latest news.
U.S. government officials say the National Geospatial-Intelligence Agency (NGA) plans to sharply reduce, and possibly halve, its plan to buy $7.3 billion of digital imagery from the two companies, sparking speculation about a consolidation in the market. Congress must still the approve the cuts.
"A merged company is probably a stronger company, and it is the job of both management teams to do what's best for their shareholders," said Andrea James, senior research analyst with Minneapolis-based Dougherty & Co. "We're now seeing that process play out in a public sphere."
GeoEye announced its takeover bid for DigitalGlobe on Friday after what it described as a break down in merger talks. Chief Executive Matt O'Connell said he was willing to restructure the 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 sharply different account of events, disclosing a series of takeover offers traded by the companies since February 2012, with each side trying to maintain the upper hand. It called GeoEye's representation "materially misleading and incomplete."
O'Connell told analysts on Friday DigitalGlobe had not tried to take over GeoEye, but DigitalGlobe disagreed.
It said it rejected previous takeover bids from GeoEye, and countered with its own proposal to take over GeoEye in an all-stock transaction that would have left DigitalGlobe's stockholders owning approximately 60 percent of the combined company and GeoEye stockholders about 40 percent. DigitalGlobe's chairman and chief executive would have remained in charge.
DigitalGlobe said it terminated that proposal after concluding that it would fare better than GeoEye in the expected round of budget cuts. It revived the offer after Friday's takeover bid from GeoEye -- only to see GeoEye reject it again.
Now DigitalGlobe said it planned to wait and see the government's decision on funding for EnhancedView, NGA's current contract with the satellite imagery providers.
DigitalGlobe's market capitalization is just over $766 million, compared with nearly $555 million for GeoEye. It provides 75 percent to 85 percent of all commercial imagery purchased by NGA, according to several sources familiar with the matter.
In a letter rejecting GeoEye's new offer, DigitalGlobe said it could "provide substantially all of what NGA is currently receiving from both companies ... at substantially lower cost."
James predicted more "back-and-forth fighting" between the companies about which provides more value to the government, but said ultimately only NGA could answer the question. "That's likely why DigitalGlobe wants to wait. They are saying they will fare better when all is said and done on the funding," she said.
DigitalGlobe last week said its share of the EnhancedView contract would be fully funded at $250 million for fiscal year 2012. The company is financing a new satellite on its own.
GeoEye told investors on Friday that its annual $150 million service agreement with NGA would be fully funded through the end of fiscal year 2012. It said $181 million, or 54 percent of the $337 million that the U.S. government plans to contribute to the cost of its new satellite, had been funded and set aside, but it had not received any additional funds beyond that level.
James said in an analyst note on Friday that the remaining 46 percent of the government's cost share on the satellite might never materialize due to looming budget cuts, but GeoEye planned to fund the rest from existing capital and cash flow.
In the letter to GeoEye, DigitalGlobe Chief Executive Jeffrey Tarr said his company had consistently shown a superior operating performance, and GeoEye's offer was triggered by worries about its own worse prospects for future orders.
DigitalGlobe also said it had "dramatically higher organic growth" as evidenced by its first quarter revenue growth rate of 12 percent, compared to only 3 percent for GeoEye.
GeoEye officials say DigitalGlobe may sell NGA more imagery, but its satellites provide higher-quality imagery. (Reporting By Andrea Shalal-Esa; Editing by Maureen Bavdek and Marguerita Choy)