By Ted Mann

Merger discussions between General Electric Co. and Baker Hughes Inc. are advancing and could result in a transaction as early as next week, people familiar with the matter said.

Baker Hughes Inc. on Friday confirmed it is in discussions with GE, a day after The Wall Street Journal reported the companies were in talks about a potential transaction. A GE spokeswoman said Thursday the company was pursuing "potential partnerships" with Baker Hughes, but GE wasn't exploring an "outright purchase."The companies are negotiating an unusually complicated transaction, one of the people said. It could involve merging GE's oil-and-gas business with Baker Hughes, which provides oil-field services, and then spinning off the combined business into a new public company. The discussions were moving quickly, another person said.

In an email to employees, Baker Hughes CEO Martin Craighead wrote, "I want to clarify that while we have been in discussions with GE, nothing is concluded and there is no guarantee anything will be concluded." He wasn't more specific about the discussions. A copy of the message was filed Friday with securities regulators.

Shares of the two companies rallied Friday. GE's shares gained 2.1%, to $29.22, in 4 p.m. trading, while Baker Hughes shot up 8.4%, to $59.12. GE and Baker Hughes declined further comment Friday.

A combination could create a company with more than $25 billion in revenue that could cut costs to better compete with rivals such as Schlumberger Ltd. to provide equipment and services to oil rigs and wells. But the companies' public statements have left Wall Street confused and analysts contemplating various options available to GE.

"Our first reaction is, 'What is a partnership?' " wrote analysts for Credit Suisse. "Combining product lines or services makes sense, but that is a 'joint venture,' not really a partnership."

A partnership could be "very important strategically" for the two companies, said Steven Winoker, an analyst at Sanford Bernstein & Co., in a note to investors. Mr. Winoker also suggested GE could leave itself an option to buy Baker Hughes down the line.

After two brutal years, GE and some of its rivals in the oil and gas business have begun to see signs of hope. Crude prices, which plunged from more than $100 in 2014 to $30 earlier this year, have rebounded to around $50 recently.

Honeywell International Inc. CEO Dave Cote told investors earlier this month that the company believes a recovery in the energy industry is coming next year. "It won't be a V-shaped recovery as we go into '17, but this is clearly the bottom, and you're starting to see the improvement of that in the fourth quarter and with the orders that we're already getting."

Just last week, GE also provided glimmers of improvement from the third quarter, noting that U.S. rig and well counts remained down 50% from the previous year, but had ticked upward in the previous three months. Still, orders for services were down across all of GE's oil business, the company said.

In recent public comments, GE has said it is still committed to the oil and gas unit for the long term, but GE says operating profit in the unit will be down by 30% for the year, and is cutting more than $1 billion in costs out of the company over two years.

There are "incremental cost actions" still to be made in the business in 2017, Chief Financial Officer Jeffrey Bornstein said last week on GE's third-quarter earnings call. But he agreed with a stock analyst who suggested that the oil business could be running low on areas to cut costs as it tries to return to profitability.

"We think Oil & Gas is going to continue, as you look forward, to be a drag," CEO Jeff Immelt said on a conference call. "Our team is doing a really good job. We're executing well. We're taking costs out. But we're not really forecasting a hockey stick in Oil & Gas."

--Joann S. Lublin contributed to this article.

Write to Ted Mann at ted.mann@wsj.com

(END) Dow Jones Newswires

October 28, 2016 18:23 ET (22:23 GMT)

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