Bronco Drilling: Death of a Deal

On Friday, Bronco Drilling and Allis-Chalmers Energy announced that they've abandoned their plans to merge "in light of clear indications that Bronco stockholders would not adopt the merger agreement."

I discussed the dynamics of this deal on Tuesday, August 4. The price did seem low, and stockholder resistence understandable.

The special shareholders' meeting that had been scheduled for August 14 to vote on the merger has now accordingly been cancelled.

Here are three items from the death of the deal:

* July 30, 2008: Proxy Governance Inc., an independent proxy advisory firm, issues a report recommending opposition to the merger. "We do not support this proposal because - in the context of share price appreciation for peers in the period since the announcement - it does not appear to offer a meaningful takeover premium, and because the share price itself - which is currently at a premium to the proposed merger consideration - seems to bolster the arguments of large shareholders that the deal undervalues the company."

* August 5, 2008, FBR Capital Markets issues a report speaking of the "strong underlying land rig market," which should allow Bronco as an independent company to outperform the valuation the dealmakers had attached to it. They expressed their "expectation that fewer than 50% of BRNC's shareholders will vote for the ALY merger agreement. Such a rejection of the current deal should allow the market to recognize the value of BRNC that has been capped by the under-priced ALY offer."

* Same day, Jefferies & Company, Inc. is heard from, another report, "Given the dramatic improvement in land rig fundamentals this year, we generally agree with the dissenting shareholders that the ALY transaction undervalues the Company."

We will see more of this. Companies trying to sell themselves at fire sale prices, only to find that the shareholders rebel, saying: "Hold on until conditions for deals improve, and get us the better price that'll be available then!"

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.”