Commercial satellite imagery provider DigitalGlobe rejected an unsolicited May 4 offer from competitor GeoEye to purchase the Longmont, Colo.-based company in a $792 million deal that would create the largest fleet of high-resolution imaging satellites in the world.

In a May 6 letter to GeoEye President and CEO Matt O’Connell, DigitalGlobe rejected GeoEye’s public offer, asserting it substantially undervalues DigitalGlobe in relation to its standalone business and financial prospects.

“Given the abruptness of GeoEye’s most recent proposal and the companies’ past discussions, we believe GeoEye made its hostile bid in desperation due to highly publicized concerns about potential government decisions that may jeopardize their portion of the EnhancedView program,” DigitalGlobe President and CEO Jeffrey Tarr wrote in the letter.

The Obama administration proposed to reduce funding next year for the Pentagon’s $7.3 billion EnhancedView commercial imagery program to $250 million from $540 million as part of its fiscal 2013 budget proposal, industry sources told Reuters last month. Moody’s had revised GeoEye’s outlook to negative in February on those concerns.

Tarr said the two companies have been in talks since February, when GeoEye made previous private unsolicited proposals “which the company believes were motivated by GeoEye’s concerns with the disproportionate risks of government budgets cuts affecting its business.”

He said DigitalGlobe rejected the proposals but proposed a counteroffer under which DigitalGlobe’s stockholders would own about 60% and GeoEye stockholders would own about 40% of the combined company, with DigitalGlobe’s chairman and CEO continuing in their respective leadership roles.

DigitalGlobe terminated those discussions because it believed that the U.S. government process ultimately will favor DigitalGlobe “and that protracted discussions would be disruptive to the U.S. government in its decision-making process as well as create needless distraction to ongoing mission performance,” Tarr wrote in the letter.

In a May 4 conference call with investors, GeoEye CEO and President Matt O’Connell positioned the takeover as best for both companies, in light of significant reductions in future Pentagon and U.S. intelligence community spending for commercial satellite imagery, which had seen a surge in business after the 9/11 terrorist attacks. O’Connell made no reference to DigitalGlobe’s counteroffer during the May 4 call.

In his letter, Tarr notes that GeoEye’s offer, detailed in a May 4 letter from O’Connell, “fails to mention that we proposed to acquire GeoEye in an all-stock transaction on March 2, 2012 and reaffirmed the same offer on April 13, 2012.”

Tarr said the DigitalGlobe offer reflects the value of the company, which currently has three healthy satellites in orbit – GeoEye has two – that Tarr says deliver “vastly more imagery” to the U.S. Defense Department’s National Geospatial Intelligence Agency (NGA) than its competitor. He said DigitalGlobe collection and delivery capabilities enable it to meet the bulk of NGA’s needs under EnhancedView “at a substantially lower cost” and suggested GeoEye was falling short of meeting NGA requirements under the contract as evidenced by “the repeated, large holdbacks you have incurred” against its Service Level Agreement (SLA) with the government.

Under the terms of the two companies’ SLAs, the Pentagon reserves the right to withhold monthly payments to the companies if they miss performance milestones, though withheld monies can be recouped later on if the milestones are achieved.

Tarr also asserted that DigitalGlobe had a stronger revenue growth rate of 12% in the first quarter of this year, compared to only 3% for GeoEye.

After rejecting GeoEye’s May 4 public offer, DigitalGlobe again made the same proposal to acquire GeoEye, conditioned on reaching agreement over the weekend.

“Given GeoEye’s rejection of that proposal, DigitalGlobe terminated discussions and will await the government reaching its budget decision regarding EnhancedView,” Tarr wrote in the letter. “When the government reaches its decision, DigitalGlobe will consider whether to make a proposal to acquire GeoEye.”