Will Grey Wolf and Precision Drilling Finally Tie the Knot? (GW, PDS, BAS)

The buyout of US driller Grey Wolf (NYSE:GW) by Canadian drilling company Precision Drilling Trust (NYSE:PDS) got its start back in April, when oilfield services company Basic Energy Services (NYSE:BAS) made an offer to buy Grey Wolf. While Grey Wolf shareholders were considering that offer, Precision Drilling made an unsolicited bid for Grey Wolf that eventually topped out at $10/share.

One proxy advisory firm, ISS Riskmetrics, counseled against the GreyWolf-Basic Energy tie-up, citing a possible conflict of interest fromGrey Wolf’s board. Ultimately, the deal was rejected by Grey Wolfshareholders, nearly 100% of which are institutional investors.

Then, Precision Drilling got serious, offering about $2 billion in cashand stock for Grey Wolf. Theinteresting thing about the offer was that it was about $1/share lowerthan the offer Precision Drilling had made earlier. The competitivelandscape had changed after all.

Then last Friday, ISS Riskmetrics and Proxy Governancerecommended that Grey Wolf shareholders accept the offer fromPrecision Drilling. Riskmetrics supports the deal because "the proposedoffer seems to have supported the Grey Wolf stock price as evidenced bythe fact that Grey Wolf’s stock price has declined significantly lessthat the average stock price decline of its peer group." Yes, that’strue, but Precision’s share price is down nearly 70% from 52-week highsit reached before it made its first unsolicited bid for Grey Wolf.

Proxy Governance supports the deal because it "appears to place a fairvalue on the company based on the overall market reaction." Themarket’s reaction since July has been to send Grey Wolf’s share pricedown about 37% from 52-week highs. Over the last twelve months, though,Grey Wolf’s share price has actually increased by 11%, while PrecisionDrilling has lost more than 45%.

Absent a last-minute offer from another buyer, this deal is expected toclose December 10th, the day after Grey Wolf’s shareholder meeting tovote on the buyout.

Paul Ausick
November 17, 2007