Monday, August 4, 2008

Bronco Drilling

Allis-Chalmers Energy has entered into a contract to buy Bronco Drilling, an oil and natural gas drill rig supplier.

Bronco shareholders will get $200 million in cash and 16.85 million shares of ALY's common stock if the deal goes through as planned.

Wexford Capital, which owns close to 13% of the issued and outstanding common stock of Bronco, thinks this is too cheap. On July 29, Wexford partner Arthur Amron, wrote the board of directors of Bronco to explain his own and his colleagues' reasoning.

The history behind this letter makes it of especial interest to me. For as it happens, Wexford created Bronco, in June 2001. Four years later, it kicked its baby out of the nest, into the world, with an IPO at $17 a share.

The IPO price of 2005 was $17 a share??? As it happens, that's about how shares are valued according to the Allis-Chalmers proposal. Anybody who stocked up on equity at the IPO price and now accepts the ALY offer is accepting a nominal value change of just about nothing, and of course a real value change well in the negative numbers, since the 2008 dollar isn't the 2005 dollar.

Glass Lewis, on the other hand, recommends that shareholders vote for the proposed merger, which they think will "create a diversified international oilfield service provider, as well as generate substantial synergies. In addition, our contribution analysis suggests that the financial terms of the agreement are fair for the Company and its shareholders.”

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