Grey Wolf Shareholders Are Told
To Reject Basic Energy Deal

By BEN CASSELMAN
July 7, 2008; Page B3

An influential proxy-advisory firm is urging shareholders of Grey Wolf Inc. to reject the natural-gas-drilling company's proposed $2.9 billion merger with Basic Energy Services Inc.

In a report issued Thursday, RiskMetrics Group Inc., formerly known as Institutional Shareholder Services, questions the rationale for the proposed merger and criticizes the board of Houston-based Grey Wolf for refusing to consider a rival offer from Canadian driller Precision Drilling Trust. The report also raised questions about potential conflicts of interest among some Grey Wolf board members voting for the deal with Basic Energy.

Many analysts had been lukewarm about the proposed Grey Wolf-Basic Energy merger, and some investors already were planning to vote against the deal at a special meeting on July 15. But the RiskMetrics report is significant because many institutional investors follow RiskMetrics' recommendations by default.

Grey Wolf Chief Financial Officer David Wehlmann said the company is disappointed with RiskMetrics' recommendation, adding that he still thinks the merger with Basic is the better deal.

"We believe that it will provide near- and long-term value to shareholders," Mr. Wehlmann said Sunday, adding that Grey Wolf's board carefully reviewed the proposed Precision deal.

Grey Wolf and Basic, based in Midland, Texas, announced their deal, billed as a merger of equals, in April. Under the agreement, Grey Wolf shareholders would own about 54% of the combined company and would receive $1.82 in cash for each Grey Wolf share they own. Basic shareholders would receive $6.70 for each of their shares and would own about 46% of the combined company.

Management would be split between the two companies, with Grey Wolf's chief executive, Thomas Richards, becoming chairman of the combined company, and Basic's chief executive, Ken Huseman, becoming CEO.

On June 9, Precision made an unsolicited offer for Grey Wolf of $9 a share in cash and stock, and has since raised its price twice, first to $9.30 and then to $10. Grey Wolf rejected all three offers. Precision has said it will stand by its $10-a-share offer if Grey Wolf shareholders reject the merger with Basic.

Grey Wolf has argued that the merger with Basic will allow it to broaden its business beyond drilling -- a highly cyclical business -- into the steadier "well services," the business of taking care of wells that have already been drilled.

Even before Precision's offer, analysts and investors had been skeptical. Grey Wolf shares fell 4.9% on the day the deal agreement was announced, and many analysts said they saw few advantages to the deal, which would provide little cost savings because of the limited overlap between the two companies' operations. When Precision -- like Grey Wolf, a land driller focused on North America -- announced its first offer, many analysts said that deal would make more sense.

"The driller-on-driller combination has many more synergies," said Michael Mazar, an analyst with BMO Capital Markets.

Mr. Mazar added that at $10 a share, the Precision deal is a better offer than the Basic deal, which he said would translate to about $8.25 a share based on Basic's current share price.

The RiskMetrics report rejected the diversification argument and raised another concern about the Basic merger: conflict of interest. Basic Chairman Steven Webster recused himself from the merger discussions because he is also a director of Grey Wolf.

But two Grey Wolf board members with ties to Mr. Webster through Avista Capital Partners, where Mr. Webster is president, didn't recuse themselves: Trevor Turbidy, an adviser for Avista, and William Ziegler, chairman of Geokinetics Inc., of which Avista is a major shareholder.

"The Board does not appear to have taken steps to address the potential conflict of interests," RiskMetrics said in its report.

Mr. Wehlmann said Mr. Ziegler and Mr. Turbidy are independent under Texas law, and noted that the other four members of the board who voted for the deal have no connection to Basic or Avista.

Write to Ben Casselman at ben.casselman@wsj.com