After several months of unsuccessfully courting its primary domestic competitor in the commercial satellite imagery business, GeoEye [GEOY] on Friday announced a $792 million takeover offer for DigitalGlobe [DGI], saying the deal would enable the two companies to reduce costs while providing its customers, particularly the Defense Department, with a more financially sound partner ahead of looming budget cuts.

GeoEye said it is offering DigitalGlobe’s shareholders $17 per share, split equally between cash and stock, although the company said it is willing to tilt the split one way or another depending on what DigitalGlobe may want. The proposed price represents a 26 percent premium to DigitalGlobe’s closing share price on May 3.

The price of the transaction could move up or down depending on changes in GeoEye’s stock.

DigitalGlobe on Friday said its board of directors will consider GeoEye’s offer and urged its stockholders not to act until after the board had reviewed the proposal.

GeoEye released a letter sent on Friday from Matt O’Connell, its president and CEO, to Jeffrey Tarr, DigitalGlobe’s president and CEO, stating the reasons for the proposed takeover. O’Connell cites a letter Tarr had sent him on May 2 that indicates DigitalGlobe agrees that a combination of the companies would enable them to “enjoy material scale and scope benefits in addition to significant cost savings and would be well positioned to meet the needs of the U.S. government and other customers.”

Both companies supply their government and commercial customers with unclassified commercial satellite imagery and related services and products through their respective earth observing satellite constellations. A primary revenue driver for both firms is the satellite imagery services they supply for the Defense Department’s National Geospatial Agency (NGA) under the EnhancedView program.

However, the Pentagon’s proposed FY ’13 budget calls for a 50 percent cut to the EnhancedView program, which would seriously crimp revenue for both companies. In FY ’12, DigitalGlobe expects to receive $250 million in payments under its contract with NGA to supply commercial satellite imagery.

“If there’s not that much money around, something has to give,” O’Connell said on the company’s first quarter earnings call on Friday. ‘So…I think what we’re doing is providing the government with a scenario where they get a very robust supply chain but at the same time this structure would have the financial flexibility that would allow us to accommodate the government in these fiscally challenging times and yet give the warfighter and disaster relief worker the imagery that they need.”

This year GeoEye is expecting its sales to be between $355 million and $375 million while Digital Globe is anticipating sales between $370 million and $387 million. In its first quarter results, GeoEye posted sales of $89.3 million, with over $37 million coming through a contract with the NGA.

While the NGA has said in the past it likes its two supplier arrangement, GeoEye’s O’Connell doesn’t expect anti-trust issues regarding a combination of the two companies. He said that the most significant cost saving synergies that would result from the deal are related to mid-term and long-term capital expenditures that would be reduced because a combined company would require one fewer satellite in its constellation.

O’Connell declined to quantify the potential cost savings that would result from the potential acquisition. He also said that that satellite imagery business is complex, with competition from assets owned and operated by the U.S. government as well as international competitors.

Defense and security analyst Josephine Millward of Benchmark Capital says in a note to clients on Friday that she believes the government will approve the deal both to maintain “U.S. market leadership” in commercial satellite imagery and to “maintain a robust domestic industrial base.” Millward also doesn’t expect the EnhancedView spending cuts to be as drastic as proposed and likes the deal for strategic reasons, including the cost savings synergies, but expects DigitalGlobe shareholders to reject the bid in favor of a higher offer.

GeoEye’s financial adviser on the bid is Goldman Sachs while Morgan Stanley and Barclays Capital are serving DigitalGlobe.