Baker Hughes to Buy BJ Services for $5.5 Billion

Baker Hughes Inc. agreed to buy BJ Services Co. for $5.5 billion, the largest oilfield-services company takeover since 1998, in a bet on U.S. natural-gas shale formations.

The price represents a 16 percent premium to BJ Services’ stock price on Aug. 28 and will leave BJ Services stockholders owning about 27.5 percent of Baker Hughes’s outstanding shares, Houston-based Baker Hughes, the world’s third-largest oilfield- services provider, said in a statement today. BJ Services shareholders will receive 0.40035 share of Baker Hughes’s stock and a cash payment of $2.69 a share.

BJ Services is the third-biggest provider of so-called pressure-pumping services, whereby slurry, often sand and water, is injected into a well to stimulate production. Pressure pumping is used in unconventional gas plays such as shale formations to break up rock. The method is expected to account for about 20 percent of the combined company’s revenue, compared with less than 1 percent for Baker Hughes last year.

“Baker’s hoping to fill a product hole that they had,” said Ted Harper, who helps oversee about $6.1 billion at Frost Investment Advisors in Houston. “They’re buying an asset that is highly correlated to a rebound in natural-gas prices, and they look to benefit as to what they hope to see as higher activity rates for land rigs somewhere down the line.”

Gas futures in New York have dropped 47 percent this year.

Valuations ‘Reasonable’

It appears that the deal valuations are “reasonable,” although BJ Services had climbed 32 percent this year in New York trading before today, said Philip Weiss, an analyst at Argus Research in New York who has a “hold” rating on the companies and doesn’t own their shares.

Baker Hughes fell $3.16, or 8.3 percent, to $34.93 as of 12:15 p.m. in composite trading on the New York Stock Exchange. BJ Services rose 89 cents, or 5.8 percent, to $16.32. The companies said the deal could close as soon as the end of this year.

The addition of BJ Services, also based in Houston, will help Baker Hughes “compete for the growing large integrated projects by incorporating pressure pumping into our product offering,” Baker Hughes Chief Executive Officer Chad Deaton said in the statement.

The acquisition will add to earnings in 2011, Baker Hughes said. The company said it expects to realize cost savings of about $75 million in 2010 and $150 million in 2011.

The takeover is the second-largest of an oilfield-services company in history, and the biggest since 1998, when Baker Hughes agreed to buy Western Atlas Inc. for about $6 billion, according to Bloomberg data.

‘Obvious Transaction’

It’s an “obvious transaction” because Baker Hughes needed to be in pressure pumping, said Dan Pickering, an analyst at Tudor, Pickering, Holt & Co. in Houston whose firm has a “hold” rating on the companies and who doesn’t own any of their shares. He said North America is waiting on a cyclical recovery, while work outside of the U.S. is becoming more bundled for oil and gas projects.

“The international side of the business is the real attraction,” Pickering said. “North America is something that I think you get when you buy BJ Services.”

Baker Hughes’s board will be expanded to include two of BJ Services’ board members, according to today’s statement. BJ Services previously was spun off from Baker Hughes in 1990. The company said on a conference call with analysts and investors that there is a $175 million breakup fee.

Deal ‘Fair’

Pickering called the price of today’s deal “fair.” Deaton, speaking on the conference call, said the deal came together early this morning after discussions in the last couple of months. It was better to do the transaction now than a year ago, Deaton said, and international work should continue to increase.

“North America is where there is some risk, there’s no doubt,” Deaton said on the call. “But we believe natural gas is going to play a key role in North America for many, many years to come.”

Goldman Sachs Group Inc. is advising Baker Hughes, as are law firms Akin Gump Strauss Hauer & Feld LLP, Fulbright & Jaworski LLP, Howrey LLP, and Morris Nichols Arsht & Tunnell LLP. BJ Services is using bankers at Greenhill & Co. and Bank of America Corp., and lawyers at Skadden Arps Slate Meagher & Flom LLP and Andrews Kurth LLP.

Schlumberger Ltd., based in Paris and Houston, and Halliburton Co., also based in Houston, are the largest oilfield-service providers.

To contact the reporters on this story: Edward Klump in Houston at