UPDATE 5-Baker Hughes to buy BJ Services for $4.9 bln

* Baker Hughes sees savings of $75 mln in 2010

* Deal seen adding to 2011 earnings per share

* Baker shares down 7.7 pct; BJ Services up 6.8 pct (Changes value of deal, adds analyst comment)

NEW YORK - Oilfield services company Baker Hughes Inc said on Monday it would buy smaller peer BJ Services Co for $4.9 billion to create a one-stop shopping destination for its oil and gas producing customers and better take on the industry's leaders.

With the deal, Baker Hughes, the No. 4 oilfield services company by market value, will be better able to compete with Halliburton Co and Schlumberger Ltd for projects that require multiple services as it bets on a recovery in the North American natural gas market.

It adds BJ's No. 3 market share in the North American pressure pumping market to Baker Hughes' portfolio of services. Pressure pumping involves injecting gas or liquids into wells to increase their output.

The stock-and-cash deal was worth $4.87 billion based on the drop in the Baker Hughes' stock price at 12:30 p.m. EDT (1630 GMT) on Monday, and excluding about $250 million in net debt. That was a decline from the $5.25 billion value of the deal, or 16 percent premium to BJ's closing price on Friday, according to the companies, whose boards have approved the transaction.

Oilfield service companies have suffered over the past year as oil and gas producers sharply cut spending on new projects and pushed for deep discounts from companies such as Baker Hughes. The proposed deal comes after natural gas prices slid to a seven-year low last week.

The business logic is one where both companies felt that all the major international oil and gas players want to rely increasingly on a one-stop approach where they can bundle services, said John Olson, a fund manager at Houston Energy Partners.

It is also a reunion. BJ was spun off from Baker Hughes in 1990.

This has long been eyed by Baker to establish a more competitive position against the other two players, Capital One Southcoast analyst Pierre Connor said. It's not a huge premium, but I think the market has been holding up BJ's price in anticipation of something like this.

BJ stockholders will receive 0.40035 share of Baker Hughes and $2.69 in cash for each of their shares, which totals $17.94 a share based on Friday's closing price.

BJ's stock rose 6.8 percent, or $1.05, to $16.48 in early afternoon trade on Monday, while Baker Hughes' shares fell about 7.7 percent to $35.16 on the New York Stock Exchange.

Baker and BJ's combined market capitalization will be about $16.3 billion, putting it ahead of National Oilwell Varco Inc (NOV.N) in the oil services field, but still well behind Schlumberger, worth $68.8 billion, and Halliburton, at $21.8 billion.

Under the terms of the deal, if either company pulls out, it must pay the other $175 million.

PRESSURE ON PUMPING

Industry analysts believe U.S. natural gas prices, which were trading below $3 per million BTU, will probably stay weak into 2010 when cuts to drilling are expected to begin to trim production, and winter demand reduces the high level of the fuel in storage.

For BJ Services, whose shares were up 41 percent so far this year but remain below the $34.90 they hit in July 2008, the purchase will allow it to link its pressure-pumping operations to a company active in more than 90 countries.

We are finding that many of the pressure-pumping jobs are being bundled into larger integrated projects, Bill Stewart, BJ Services' chairman and CEO, said on a conference call.

Pressure-pumping is expected to become increasingly important in North America with the rise of unconventional natural gas fields, such as tight gas and shale gas. Pressure-pumping accounts for more than half the costs to develop those wells.

Baker, which will pay about 10 times BJ Services' 2010 earnings before interest, taxes, depreciation and amortization, expects the transaction to add to profits by 2011.

The deal will better position us to drive international growth and to compete for the growing large integrated projects by incorporating pressure pumping into our product offering, Baker Hughes CEO Chad Deaton said.

Pressure-pumping accounts for about 75 percent of BJ Services' revenue. The acquisition will lift pressure-pumping at Baker Hughes to about 20 percent of revenue from about 1 percent.

Baker Hughes expects annual cost savings of about $75 million in 2010 and $150 million in 2011. (Reporting by Matt Daily, Michael Erman and Christopher Kaufman in New York, Anna Driver in Houston and Adveith Nair in Bangalore; Editing by Lisa Von Ahn, Maureen Bavdek, Tim Dobbyn)