Buck This Bronco Deal

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When it comes to Bronco Drilling (Nasdaq: BRNC), I've paid too much attention to the horses rather than the riders.

It doesn't possess as premium a fleet as Helmerich & Payne (NYSE: HP) or Precision Drilling Trust (NYSE: PDS), but Bronco has some decent iron, thanks to an in-house machine shop and a knack for rig refurbishment. For months, the company has been trading at or below book value, which materially understates the value of the fleet.

Allis-Chalmers Energy (NYSE: ALY) must feel the same way, because the company recently made a friendly bid for Bronco. In fact, I know how Allis-Chalmers' CEO feels, because he acknowledged what a steal Bronco is during the merger conference call. Having seen a June 2007 independent appraisal of Bronco's drilling rigs, this fellow should know.

On the day of the merger announcement, Allis-Chalmers' shares closed nearly 5% higher. Since acquiring companies' shares nearly always fall on merger announcements, it's not a big stretch to identify this as a low-ball offer. You can't blame these guys for trying to pick up Bronco at around four times EBITDA.

What's appalling is that the latter company's board accepted.

A glance at share ownership figures tells me that insiders hold less than 0.05% of Bronco's outstanding shares, plus some options that they've yet to exercise. Top executives' change in control agreements stipulate that they collect severance pay in the amount of three times base salary plus a bonus, so I can see why the deal might look attractive to them personally.

Fool-minded fund managers Third Avenue, on the other hand, hold more than 20% of Bronco shares, and their message in a recent SEC filing couldn't be more clear: Buck this deal.