Oilfield services company Baker Hughes Inc said on Monday it would buy peer BJ Services Co for $5.5 billion to broaden its product line and take on the industry's giants

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, executives from the companies said.

The stock-and-cash deal values BJ at a 16 percent premium over its 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. The proposed deal comes after natural gas prices slid to a seven-year low last week.

The deal will make Baker Hughes a major player in the key North American pressure pumping, in which gas or liquids are injected into wells to increase production.

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 Services 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 7.2 percent, or $1.12, to $16.55, while Baker Hughes' shares fell about 7 percent, or $2.72, to $35.32, both in New York Stock Exchange early trading.

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


Industry analysts believe natural gas prices 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 have fallen from the $34.90 reached in July 2008, its acquisition links its No. 3 position in North American pressure pumping 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.

In addition, 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 earning 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 Chief Executive Officer 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 and Adveith Nair in Bangalore; Editing by Lisa Von Ahn and Maureen Bavdek)