Allis-Chalmers to buy Bronco Drilling for $437.8 mln

By Chakradhar Adusumilli

BANGALORE (Reuters) - Oilfield services company Allis-Chalmers Energy Inc (ALY.N) agreed to buy Bronco Drilling Company Inc (BRNC.O) for about $437.8 million in cash and stock to gain a firmer foothold in the United States and expand in the Latam and African markets.

Shares of the companies rose on the news as the deal is expected to benefit both firms at a time when the oilfield services market in North America is being hit by weaker prices fueled by oversupply.

Allis-Chalmers' offer values Bronco at $16.33 a share, 21.8 percent more than its closing price of $13.41 Wednesday.

Shares of Bronco, which had lost more than 18 percent over the last 52 weeks before Thursday's gains, jumped as much as 17 percent to $15.78. Allis-Chalmers' stock spiked almost 14 percent, recouping from a plunge of more than 60 percent since its July 2007 high of $28.08.

The deal makes sense for Bronco in particular because it is trying to diversify away from land drilling, Calyon Securities analyst Mark Urness said by phone. "And so this gets them where they wanted to be five years from now."

Even though it is unusual for a services company to acquire a driller, the deal makes sense for Allis-Chalmers as it will help the firm expand outside the North American market to Latin America and North Africa, Urness said.

Mexican state oil monopoly Pemex and Brazil's state-run energy giant Petrobras are expected to significantly ramp up operations in the immediate future, Urness added.

LOWER PRICES, CHEAPER STOCKS

Pricing pressures due to an oversupply in the U.S. oil services market has hurt the bottomlines and market values of companies like Bronco Drilling, making valuations attractive.

Bronco's shares trade at just over 11 times forward earnings, compared with the Oil and Gas Drilling sector which is at a multiple of 10.

Under the deal, Bronco Drilling shareholders will receive $280 million in cash and Allis-Chalmers common stock worth about $157.8 million.

Houston, Texas-based Allis-Chalmers, which operates in Argentina, Mexico and Bolivia apart from the U.S. market, said the deal will significantly add to its earnings.

The company received a financing commitment for up to $350 million to cover the cash component of the deal.

Success of this deal may well pave the way for other merger opportunities, especially since land drillers such as Unit Corp (UNT.N) and Grey Wolf GW.A are trading at low valuations, Urness said in a note.

Bronco Drilling shares were up more than 17 percent at $15.72 in late afternoon trade on the Nasdaq.