Baker Hughes Inc., Houston, (NYSE: BHI) plans to merge with BJ Services Co., Houston, (NYSE: BJS) in a deal valued at $5.5 billion.

Baker Hughes will issue 0.40035 share and $2.69 in cash per BJ Service share. This represents a premium to BJ Services stockholders of 16.3% above the closing price of BJ Services stock on Aug. 28. Pro forma, BJ Services shareholders will own approximately 27.5% of Baker Hughes’ outstanding shares.

BJ Services provides pressure-pumping and oilfield services for the U.S. and international petroleum. The company’s pressure-pumping services include cementing services and stimulation services that include fracturing, acidizing, sand control, nitrogen services, coiled tubing, and service tools. Its oilfield services include casing and tubular services that comprise installing or running casing and production tubing into a wellbore; process and pipeline services, including oil and gas production, refineries, and gas and petrochemical plants.

Baker Hughes chairman, president and chief executive Chad Deaton says, “The transaction further enhances Baker Hughes’ position as a top-tier global oilfield services company. BJ Services broadens our portfolio by adding products, technologies and talented people that are key to helping our customers unlock value in their reservoirs, particularly in unconventional gas and deepwater fields. It 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 expects to realize annual cost savings of approximately $75 million in 2010 and $150 million in 2011 as it eliminates redundant costs, consolidates facilities and further rationalizes field costs. Baker Hughes expects the combination to be accretive to earnings per share in 2011.

The Baker Hughes board will be expanded to include two BJ Services board members.

BJ Services chairman, president and CEO Bill Stewart says, “We are very pleased to be joining forces with Baker Hughes and believe that this is an attractive combination for all of BJ Services' constituencies: customers will benefit from our wider and better-integrated array of services and technologies; our employees will enjoy the advantages and opportunities of being a part of a larger, stronger company; and BJ Services’ stockholders will have the opportunity to continue to participate in the success of the combined enterprise.”

Although pressure-pumping accounted for less than 1% of Baker Hughes’ revenues in 2008, it is expected to generate approximately 20% of the combined company's revenues, providing Baker Hughes with revenues from pressure pumping that approaches its two largest competitors. Pressure-pumping has grown in importance as customers have looked for new ways to unlock the full value of their reservoirs. The number of fields requiring pressure-pumping services is expected to grow, especially outside of North America, where BJ Services can leverage Baker Hughes’ extensive international presence as it pursues growth opportunities.

Goldman, Sachs & Co. is financial advisor to Baker Hughes. Akin Gump Strauss Hauer & Feld LLP, Fulbright & Jaworski LLP, Howrey LLP and Morris, Nichols, Arsht & Tunnell LLP are legal advisors to Baker Hughes.

Greenhill & Co. is financial advisor to BJ Services and issued a fairness opinion. BofA Merrill Lynch Securities also rendered a separate fairness opinion to BJ Services. Skadden, Arps, Slate, Meagher & Flom LLP and Andrews Kurth LLP are legal advisors to BJ Services.

The deal is expected to close by year-end.