jh13da-bronco_thirdave.htm

0000895345-08-000254.txt : 20080408 0000895345-08-000254.hdr.sgml : 20080408 20080408105756 ACCESSION NUMBER: 0000895345-08-000254 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20080408 DATE AS OF CHANGE: 20080408 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: Bronco Drilling Company, Inc. CENTRAL INDEX KEY: 0001328650 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 202902156 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-80976 FILM NUMBER: 08744515 BUSINESS ADDRESS: STREET 1: 16217 NORTH MAY AVENUE CITY: EDMOND STATE: OK ZIP: 73013 BUSINESS PHONE: 405.242.4444 MAIL ADDRESS: STREET 1: 16217 NORTH MAY AVENUE CITY: EDMOND STATE: OK ZIP: 73013 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: THIRD AVENUE MANAGEMENT LLC CENTRAL INDEX KEY: 0001099281 IRS NUMBER: 010690900 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 622 THIRD AVENUE STREET 2: 32ND FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2128885222 MAIL ADDRESS: STREET 1: 622 THIRD AVENUE STREET 2: 32ND FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: EQSF ADVISERS INC DATE OF NAME CHANGE: 19991118 SC 13D/A 1 jh13da-bronco_thirdave.htm SCHEDULE 13D/A jh13da-bronco_thirdave.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 13D/A

Under the Securities Exchange Act of 1934

(Amendment No. 2)*

Bronco Drilling Company, Inc.

(Name of Issuer)

Common Shares

(Title of Class of Securities)

112211107

(CUSIP Number)

Third Avenue Management LLC

Attn: W. James Hall

622 Third Avenue, 32nd Floor

New York, NY 10017

(212) 888-2290

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

April 1, 2008

(Date of Event Which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of §§240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box. x

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See §240.13d-7 for other parties to whom copies are to be sent.

* The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

Persons who respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

CUSIP No. 112211107

1	NAMES OF REPORTING PERSONS: I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY): Third Avenue Management LLC (01-0690900)
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS): (a)  (b) 
3	SEC USE ONLY:
4	SOURCE OF FUNDS (SEE INSTRUCTIONS): WC
5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e): 
6	CITIZENSHIP OR PLACE OF ORGANIZATION: Delaware
NUMBER OF SHARES BENEFI- CIALLY OWNED BY EACH REPORTING PERSON WITH	7	SOLE VOTING POWER: 6,166,451 shares
	8	SHARED VOTING POWER: 0
	9	SOLE DISPOSITIVE POWER: 6,166,451 shares
	10	SHARED DISPOSITIVE POWER: 0
11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON: 6,166,451 shares
12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES  (SEE INSTRUCTIONS):
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11): 23.47%
14	TYPE OF REPORTING PERSON (SEE INSTRUCTIONS): IA

Note: All shares identified above are the Issuer’s common shares, and the percentage in Row 13 above relates to such common shares.

This Amendment No. 2 to Schedule 13D amends certain information contained in the Schedule 13D dated and filed January 25, 2008 (the “Schedule 13D”) by Third Avenue Management LLC (“TAM”) relating to the shares of the common stock (the “Common Stock”) of Bronco Drilling Company, Inc., a Delaware corporation (the “Company”), and Amendment No. 1 to the Schedule 13D dated and filed on March 6, 2008. Capitalized terms used herein but not otherwise defined have the meanings ascribed to such terms in the Schedule 13D. Information regarding the ownership of Common Shares set forth herein is as of the close of business on April 7, 2008.

Item 3. Source and Amount of Funds or Other Consideration

Item 3 is amended as follows:

TAM is a registered investment adviser that acts as direct adviser to certain investment companies and other funds, as a sub-adviser to certain other institutions, and as an adviser to separately managed accounts. Certain portfolios of these funds have used working capital to purchase Common Shares upon the orders of TAM acting as adviser or sub-adviser.

Advised Funds:

(i) Met Investors Series Trust of the Third Avenue Small Cap Portfolio, an investment company registered under the Investment Company Act of 1940, has expended $55,519,089.87 to acquire 3,535,538 Common Shares; (ii) Third Avenue Small Cap Value Fund, an investment company registered under the Investment Company Act of 1940, has expended $33,671,698.75 to acquire 2,189,832 Common Shares; (iii) Third Avenue Value Portfolio of the Third Avenue Variable Series Trust, an investment company registered under the Investment Company Act of 1940, has expended $4,272,980.02 to acquire 276,988 Common Shares; and (iv) Touchstone Variable Series Trust-Touchstone Third Avenue Value Fund, an investment company registered under the Investment Company Act of 1940, has expended $2,584,418.29 to acquire 164,093 Common Shares. TAM plans to use the available capital of these funds and accounts in any future purchase of Common Shares.

Item 4. Purpose of Transaction

Item 4 is amended as follows:

On April 8, 2008, TAM published an open letter to the Issuer’s Chief Executive Officer stating its opposition to the Merger, which letter is attached hereto as Exhibit A.

TAM may consider the feasibility and advisability of various alternative courses of action with respect to its investment in the Issuer including, without limitation, (i) to hold the Common Shares as a passive investor or as an active investor (including as a member of a “group” with other beneficial owners of the Issuer’s securities), (ii) to acquire beneficial ownership of additional securities of the Issuer in the open market, in privately negotiated transactions or otherwise, or (iii) to dispose of, or cause to be disposed, any or all of the Common Shares held by it at any time.

In connection with its consideration of various alternatives, TAM may seek to meet with the board of directors and/or members of senior management or communicate publicly or privately with other stockholders or third parties to indicate its views on issues relating to the strategic direction undertaken by the Issuer and other matters of interest to stockholders generally. As part of any such discussions, TAM may suggest changes in, or take positions relating to, the strategic direction of the Issuer as a means of enhancing shareholder value. Such suggestions or positions may be related to one or more of the transactions specified in clauses (a) through (j) of Item 4 of the Schedule 13D.

Except as set forth above, TAM has no present plans or intentions which would result in or relate to any of the transactions described in subparagraphs (b) through (j) of Item 4 of Schedule 13D.

Item 5. Interest in Securities of the Issuer

(a-b) The aggregate number and percentage of Common Shares to which this Schedule 13D relates is 6,166,451 Common Shares, constituting approximately 23.47% of the 26,269,961 Common Shares outstanding.

A.	Met Investors Series Trust of the Third Avenue Small Cap Portfolio

	(a)	Amount beneficially owned: 3,535,538 Common Shares.
	(b)	Percent of class: 13.46%
	(c)	Number of Common Shares as to which TAM has:

		(i)	Sole power to vote or direct the vote: 3,535,538
		(ii)	Shared power to vote or direct the vote: 0
		(iii)	Sole power to dispose or direct the disposition: 3,535,538
		(iv)	Shared power to dispose or direct the disposition: 0

B.	Third Avenue Small Cap Value Fund

	(a)	Amount beneficially owned: 2,189,832 Common Shares.
	(b)	Percent of class: 8.34 %
	(c)	Number of Common Shares as to which TAM has:

		(i)	Sole power to vote or direct the vote: 2,189,832
		(ii)	Shared power to vote or direct the vote: 0
		(iii)	Sole power to dispose or direct the disposition: 2,189,832
		(iv)	Shared power to dispose or direct the disposition: 0

C.	Third Avenue Value Portfolio of the Third Avenue Variable Series Trust

	(a)	Amount beneficially owned: 276,988 Common Shares.
	(b)	Percent of class: 1.05%
	(c)	Number of Common Shares as to which TAM has:

		(i)	Sole power to vote or direct the vote: 276,988
		(ii)	Shared power to vote or direct the vote: 0
		(iii)	Sole power to dispose or direct the disposition: 276,988
		(iv)	Shared power to dispose or direct the disposition: 0

D.	Touchstone Variable Series Trust-Touchstone Third Avenue Value Fund

	(a)	Amount beneficially owned: 164,093 Common Shares.
	(b)	Percent of class: 0.62%
	(c)	Number of Common Shares as to which TAM has:

		(i)	Sole power to vote or direct the vote: 164,093
		(ii)	Shared power to vote or direct the vote: 0
		(iii)	Sole power to dispose or direct the disposition: 164,093
		(iv)	Shared power to dispose or direct the disposition: 0

(c) A list of the transactions in the Issuer’s Common Shares that were effected by TAM since March 6, 2008 is attached as Schedule A hereto and is incorporated herein by reference. All of the transactions listed on Schedule A were effected in the open market.

(d) No other person is known to have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, such Common Shares other than the funds and accounts identified above.

(e) Not applicable.

Item 7. Material to be Filed as an Exhibit

The following documents are filed as exhibits:

Schedule A: List of the transactions in the Issuer’s Common Shares that were effected by TAM since March 6, 2008.

Exhibit A: Open Letter to Chief Executive Officer

SIGNATURE

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.

	Dated: April 8, 2008

	THIRD AVENUE MANAGEMENT LLC

	By:	/s/ W. James Hall
		Name: W. James Hall
		Title: General Counsel

Schedule A

Fund	Nature of Trade (Purchase or Sell)	Transaction Date	Quantity of Shares	Price per Share or Unit
Met Investors Series Trust	PURCHASE	3/25/08	1,052	15.98
Met Investors Series Trust	PURCHASE	3/26/08	35,900	16.04
Met Investors Series Trust	PURCHASE	3/27/08	76,746	16.09
Met Investors Series Trust	PURCHASE	3/28/08	80,000	16.12
Met Investors Series Trust	PURCHASE	3/31/08	76,149	16.11
Met Investors Series Trust	PURCHASE	4/1/08	50,000	16.14
Met Investors Series Trust	PURCHASE	4/2/08	8,992	16.24
Met Investors Series Trust	PURCHASE	4/3/08	1,496	16.09

EX-99.A 2 jhbroncoex99_a.htm EXHIBIT A jhbroncoex99_a.htm

Bronco Drilling Company, Inc.

16217 N. May Avenue

Edmond, Oklahoma 73013

Re:

Third Avenue Management’s Opposition to Proposed Acquisition of Bronco Drilling Company, Inc.

Dear Mr. Harrison:

Third Avenue Management LLC (“TAM”), on behalf of its investment advisory clients, currently owns more than 6.1 million common shares of Bronco Drilling Company, Inc. (“Bronco”), representing approximately 23.47% of Bronco’s outstanding common stock. We have previously conveyed to you our dissatisfaction over the announced terms and structure of the proposed acquisition of Bronco by Allis-Chalmers Energy.

We have reviewed the joint proxy statement/prospectus filed in connection with Allis-Chalmers’ registration statement on Form S-4, as amended, along with Bronco’s fourth quarter earnings release and Bronco’s most recent Form 10-K filed March 17, 2008. Based upon our review, we continue to believe that the proposed merger with Allis-Chalmers undervalues Bronco’s common stock and is not in the best interest of Bronco’s shareholders. As a result, we intend to vote our shares against the proposed merger. Our rationale for opposing the proposed merger with Allis-Chalmers is as follows.

Valuation is Inadequate

The implied proposed merger price of $16.33 per share values Bronco at 11.3 times 2007 EPS, 4.6 times 2007 EBITDA and only a slight premium to tangible book value. The 2007 earnings do not include any benefit from Bronco's successful expansion into international markets through its investment in Challenger Limited in January 2008. The fourth quarter 2007 numbers were negatively impacted by the movement of rigs to be contributed or sold to Challenger in preparation for mobilization to Libya. According to Bronco’s management’s estimates, the Challenger investment is expected to be $0.12-$0.13 accretive in 2008 with a higher run rate going forward.

Additionally, we believe that the 2007 multiples understate the intrinsic value of Bronco’s common stock as industry conditions were depressed during much of 2007 owing to excess rig capacity and soft natural gas prices. For example, the implied per share merger price values Bronco’s common stock at only 6.7 and 3.8 times 2006 EPS and EBITDA, respectively.

One of the metrics used in the fairness opinion described in the joint proxy/prospectus is comparable company analysis. Since January 23, 2008, the day before the proposed merger was announced, Bronco’s peer group, as identified in the joint proxy/prospectus by Johnson Rice & Company, L.L.C., Bronco’s financial advisor, has appreciated by an average of 39% through April 4, 2008. In addition, Bronco’s peer group as identified in the joint proxy/prospectus by RBC Capital Markets Corporation, Allis-Chalmers’ financial advisor, has appreciated by 38% over that same time period. Allis-Chalmers’ stock is up 27% since the deal was announced. Bronco’s upside, however, has been capped by the deal structure and Bronco’s shareholders are not able to participate in the appreciation of Allis-Chalmers’ stock because the aggregate value of the total stock consideration issuable in the merger is fixed.

Another metric used in the joint proxy/prospectus is comparable transaction analysis. According to the Johnson Rice analysis, the average projected year-end EV/EBITDA multiple was 5.7x for oil field service transactions compared to the projected year-end EV/EBITDA multiple to be received by Bronco shareholders from Allis-Chalmers of 5.0x. We see no reason for such a substantial discount.

A third metric described in the joint proxy/prospectus is discounted cash flow analysis. The RBC analysis of Bronco’s discounted cash flow established an implied per share equity value for Bronco common stock ranging from $18.64 to $25.21, well in excess of the $16.33 per share implied value of the merger consideration. RBC’s numbers are much more consistent with our view of Bronco’s intrinsic value.

On any analysis, Bronco’s shareholders are not receiving anywhere close to the amount of control premium that they deserve.

Business Fundamentals are Improving

We believe that Bronco’s shareholders will do better continuing to own Bronco as a stand alone company, particularly in light of the improving fundamentals in the natural gas drilling market in the U.S. There have been a number of recent data points that highlight these trends:

The Land Rig Newsletter’s Biweekly Recap, dated March 14, 2008, begins by saying “Welcome to better times in land drilling. Over the last 90 days, the land drilling industry has moved from near certain floundering on the shoals of Too Much Natural Gas in 2008 into decidedly better sailing.” The March 2008 Land Rig Newsletter published April 2, 2008, goes on to say “contractors are reporting that inquiries regarding rig availability and pricing have picked up noticeably in the last 30 days. Interest in rig availability grows as strong commodity prices generate rising cash flow for operators.”

·	According to Rig Data, U.S. land rig permits, an important indicator of future drilling activity, increased 10.7% in Q1 2008 over the comparable period in 2007.

A Johnson Rice research report, dated March 14, 2008, titled “Natural Gas – fundamentals turning up” recommends an increased weighting in natural gas sensitive stocks as “natural gas has broken out over the key $8/mcf level. Prices are now at levels that should stimulate activity at the margin. We expect more rigs to return to work.”

On March 24, 2008, Chesapeake Energy Corporation, one of Bronco’s largest customers, announced that it was increasing its drilling and leasehold expenditures by $275 million in 2008 and $675 million in 2009. Additionally, on March 27, 2008, another of Bronco’s customers, St. Mary Land and Exploration Company, announced that it was increasing its 2008 capital investment budget in the Mid-Continent region to $155 million from $135 million. Several other leading exploration and production companies are forecasting significant increases in 2008 capital spending, including ExxonMobil, Encana and Anadarko.

·	Natural gas futures, a key driver in the capital expenditure decisions of exploration and production companies, have increased substantially since January 23, 2008, the day the merger agreement was executed, as evidenced in the table below.

Natural gas futures contract prices:
	23-Jan-08	4-Apr-08
NG1	7.621	9.322
NG2	7.581	9.412
NG3	7.586	9.514
NG4	7.641	9.572
NG5	7.724	9.583
NG6	7.808	9.652
NG7	7.879	9.912
NG8	7.892	10.262
NG9	7.971	10.487
NG10	8.226	10.462
NG11	8.511	10.232
Source: Bloomberg
Based on a monthly cycle

Further, we believe that the international marketplace holds great promise and agree with the comments of Allis-Chalmers’ Chairman and CEO, Munawar Hidayatallah, from Allis-Chalmers’ January 24, 2008 press release announcing the merger when he said “the opportunity to deploy drilling rigs and workover rigs to the high growing international markets is very compelling. Bronco Drilling is uniquely positioned to take advantage of this opportunity because of its in-house capability of converting and rebuilding rigs for international operations."

Sales Process was Flawed

The “Background of the Merger” section in the joint proxy/prospectus confirms our initial impression that the sales process was flawed and did not serve to achieve an appropriate price for Bronco’s equity. Specifically, we note the following deficiencies in Bronco’s sales process:

From October 17, 2007, when Frank Harrison, Bronco’s Chairman and CEO, and Munawar Hidayatallah, Allis-Chalmers’ Chairman and CEO, had their initial meeting, until January 23, 2008, when the merger agreement was executed, no other potential parties appear to have been contacted by Bronco’s management, Board of Directors or Johnson Rice, Bronco’s financial advisor.

The “market check” appears to have consisted only of a review with the Bronco Board of Directors of discussions with two public oil field services companies and one financial investor that had occurred since June 2006 and that “had not progressed beyond preliminary discussions.” We view this as wholly inadequate.

·	The Bronco Board of Directors appears to have relied on management’s and Johnson Rice’s view that it was unlikely that another strategic buyer or financial buyer would emerge, without providing any mechanism to check the accuracy of that view.

·	The merger agreement does not include a “Go Shop” or similar provision that would have been appropriate given the absence of a credible market check during the sales process.

Despite Bronco’s strong financial position, there was no review by the Board of Directors of alternatives to selling the company such as domestic acquisitions and/or a large share repurchase. This appears to be at odds with the attractive long term business outlook described in Bronco’s recently filed Form 10-K. Specifically, United States consumption of natural gas is expected to exceed production by 24% in 2010 and within 10 years 80% of natural gas production “will be from wells yet to be drilled.” The only strategic alternative considered appears to have been international expansion.

·	Johnson Rice had a clear conflict of interest in delivering its fairness opinion both because Johnson Rice will receive a “success fee” only if the merger occurs and because Johnson Rice also has done significant work for Allis-Chalmers.

These factors, coupled with the prohibition in the merger agreement on Bronco soliciting other potential bidders and the required payment of a termination fee if the merger agreement is terminated, operate together to produce a proposed merger transaction with an inadequate price and in which other possible bidders were not allowed to, or effectively able to, participate.

Combined Balance Sheet is Highly Leveraged

As stated in our previous letter, we are very wary of being shareholders in a post-merger combined highly leveraged company in a cyclical and capital intensive industry. While Bronco’s balance sheet is very strong (debt/equity as of December 31, 2007 was 17% and EBIT/interest expense was 13.4 times), Allis-Chalmers’ balance sheet has significantly more leverage. Pro-forma for the merger, Allis-Chalmers’ total outstanding long-term debt as of December 31, 2007, would have been $864.7 million. Pro-forma debt/equity would have been 151% and EBIT/interest expense would have been 2.3 times. As outlined in the “Risk Factors” section of the joint proxy/prospectus, Allis-Chalmers’ substantial debt load could have a material adverse effect on its financial health and limit its future operations.

Concluding Thoughts

We are long-term investors who invested in Bronco because it was a well-financed, well-managed company trading at a significant discount to intrinsic value. We continue to be excited about the long-term prospects for Bronco.

In light of our strong belief in the future prospects of Bronco, we believe that the proposed merger price is woefully inadequate. Without significant improvement in the consideration being offered to Bronco’s shareholders, we believe that Bronco should remain a stand alone company.

For all of these reasons, we intend to vote against the merger and we encourage other Bronco shareholders to do the same.

Sincerely,

Curtis Jensen	Kathleen Crawford
Portfolio Manager, Co-Chief Investment Officer	Analyst and Assistant Portfolio Manager