Shares of DigitalGlobe rose as much as 10 pct while those of GeoEye jumped 9 percent in response to the first positive news for the sector in quite a while.

Both DigitalGlobe and GeoEye provide digital imagery services to U.S. military and intelligence agencies and are working on next-generation satellites to double their capacity.

But their shares have been hammered in recent months amid news that the U.S. National Geospatial-Intelligence Agency plans to sharply reduce and possibly halve its purchases of those products over the next years.

The prospect of sharply lower U.S. government orders has prompted an unusual flurry of takeover negotiations between DigitalGlobe, which had a market capitalization of $731.26 million on Friday, and GeoEye, with a market capitalization of $426.87 million. The situation is at an impasse at the moment, but industry analysts do not believe the lower level of orders will be great enough over the longer term to sustain both companies.

The Senate Armed Services Committee announced late on Thursday that it had voted to authorize $125 million in continued funding for commercial imagery purchases in fiscal year 2013, which begins in October, restoring funds cut by the Pentagon in its proposed budget.

The move would maintain funding at fiscal year 2012 levels and mandates a study by the Joint Staff and the Congressional Budget Office on the requirements for commercial imagery. A full report is due to be released in early June.

But the funding still has a long way to go before becoming law. It must still be approved by the full Senate and the House of Representatives, and will need action by both House and Senate appropriations committees before it can take effect.

U.S. defense officials say cutting funding for commercial imagery was a difficult, but necessary choice given Pentagon plans to cut funding by $487 billion over the next decade.

COMPANIES WELCOME SENATE PANEL'S MOVE

Many U.S. military commanders like using commercial imagery because it is easier to share with allies, but defense officials say they are trying to find ways to improve their ability to share even classified data with allies. They also say they expect to double the production of digital satellite imagery with their own new government-owned satellites.

DigitalGlobe, which says it is better positioned to weather the cuts than GeoEye since it provides more imagery to the government at lower cost, said the committee's decision underscored the value of commercial imagery.

"DigitalGlobe is committed to continuing our legacy of providing superior value and performance to the U.S. government and taxpayers in support of our customer and national defense," the company said in a statement.

GeoEye also welcomed the news and said it continued to work on its new satellite, GeoEye-2, which it said would be the world's highest resolution and most accurate commercial satellite in orbit, when it is launched next year.

"While these are challenging fiscal times, the Senate Armed Services Committee and other defense and intelligence committees continue to express concerns with the risk reflected in the proposed budget," said Steve Wallach, GeoEye senior vice president for national security strategy.

GeoEye got another shot in the arm last week when it passed a key milestone on its new satellite, which will pave the way for the company to receive $111 million in cost-share funding already set aside by NGA, according to two sources familiar with the situation.

NGA is also taking steps to temporarily extend a service contract with GeoEye that is due to expire in September, said one of the sources, who was not authorized to speak publicly. That move will keep the company's work "on life support" until the future funding issue is resolved with Congress.

GeoEye has said its service agreement will be fully funded in fiscal 2012, but analysts say the company is unlikely to receive the full amount of cost-share funding for the new satellite that the federal government initially promised, analysts believe.

Dougherty & Company analyst Andrea James said shares were clearly buoyed by the Senate committee's move.

"The Senate is showing public support for commercial satellite imagery programs, which save taxpayer money ... this is the first concrete positive development that investors have seen in a while," she said via email.

DigitalGlobe shares rose $1.07, or 6.8 percent higher, to close at $16.76 on the New York Stock Exchange while GeoEye shares closed $1.29 higher, up 6.75 percent, at $20.39 on the Nasdaq.

(Reporting by Andrea Shalal-Esa and Kartick Jagtap in Bangalore; Editing by Sreejiraj Eluvangal, Gary Hill)

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