(Reuters) - Shares of GeoEye Inc lost more than a quarter of their value after the U.S. National Geospatial Intelligence Agency (NGA) said it will not renew a major contract with the company, making the satellite imagery provider a potential takeover target.
GeoEye and rival DigitalGlobe Inc won contracts worth $7 billion from the NGA to provide high-resolution satellite images under the EnhancedView project in 2010.
The intelligence agency on Friday proposed an option under which GeoEye would get service revenue of $39.75 million for the three month ending November 2012, and a nine-month option providing for $119.3 million, contingent on funding.
The EnhancedView SLA program accounted for about $147 million, or about 41 percent of GeoEye's revenue for 2011.
Rival DigitalGlobe last week said the NGA plans to renew its EnhancedView contract for the third year.
"The contract loss raises the real possibility that GeoEye could become a minority partner on the program," Raymond James analyst Chris Quilty said, downgrading GeoEye to "underperform" from "strong buy."
Friday's news could determine the fate of consolidation in the commercial satellite imagery industry.
GeoEye offered to buy DigitalGlobe for $792 million in May. But DigitalGlobe rejected the offer, saying it would fare better than GeoEye in the expected round of budget cuts and would wait for the decision on EnhancedView contract to take the next step.
Against the backdrop of funding uncertainty, it is difficult to construct a scenario in which GeoEye can improve upon its $792 million bid, JP Morgan analyst Paul Coster said.
"DigitalGlobe might be positioned to acquire GeoEye under favorable terms if the latter loses NGA funding," he said.
Benchmark analyst Josephine Millward also said GeoEye will become a "take-out" target after Friday's news.
The cuts would significantly lower GeoEye's profitability next year and it may not be able to pay its 2013 bond interest payments if the nine-month extension is not exercised, he said downgrading GeoEye's stock to "hold."
Shares of GeoEye, which have fallen 23 percent since DigitalGlobe rejected its takeover offer in May, fell to a six-year low of $13.13 on the Nasdaq on Monday morning. The stock was among the top losers on the exchange.
(Reporting by Megha Mandavia in Bangalore; Editing by Joyjeet Das, Supriya Kurane)