Grey Wolf Finally Gets its Wish, Sort Of (GW, PDS, BAS)

The board of directors of Grey Wolf, Inc. (AMEX:GW) has been trying to sell the company for at least a couple of months at a higher price. Today, they appear to have gotten their wish. Sort of.  Canada’s Precision Drilling Trust (NYSE:PDS) and Grey Wolf have announced a definitive agreement under which Precision will acquire Grey Wolf for $5/share in cash and 0.1883 new units in Precision for each share of Grey Wolf. That comes to $1.12 billion in cash and 42 million units, worth about another $897 million.  In other words, $9.02 before any dilution and before the 7% "PDS" drop today.

The deal has had its ups and downs. In April, Grey Wolf’s board hadagreed to a merger with Basic Energy Services (NYSE:BAS). Precisioninserted an unsolicited bid for Grey Wolf in June, and then sweetened the offera couple of times. Finally, in July, Grey Wolf’s shareholders rejectedBasic’s bid. Today’s deal represents an increase of about 4.5% in thetotal number of units included in Precision’s last offer.

In it’s press release today, Precision noted that Grey Wolf’s board"believes this consideration represents a substantial premium over an‘unaffected’ Grey Wolf stock price without the influence of Precision’sprevious public announcements regarding its desire to acquire GreyWolf." What the heck is the "unaffected" stock price? On June 8th, theday before Precision’s initial offer was announced, Grey Wolf stockclosed at $8.28. Last Friday, Grey Wolf closed at $8.59. Is either ofthose prices "unaffected? Or maybe the "unaffected" stock price is$7.60/share, the price of a share before the first Basic Services offer?

Precision’s previous offer for Grey Wolf used a 2008 cash flow multipleof 8.1 to derive a premium of 34% above Grey Wolf’s 30-day averageclosing stock price on June 8th. Today’s offer actually reducesPrecision’s last offer by about $1/share. Grey Wolf shareholders getless cash, but a larger stake in the combined company.

We had noted to readers of our weekly "10 Stocks Under $10"newsletter that many investors were hoping for $10.00 or even a bit higher.Because virtually all of Grey Wolf’s stock is held by institutionalinvestors, this offer could be deemed to be too low still. In earlytrading today, Grey Wolf is down by about $0.15, and Precision is downmore than $1.25.

Paul Ausick
August 25, 2008