Tower Group to buy CastlePoint for $490 million

(Reuters) - Insurance company Tower Group Inc (TWGP.O) agreed to acquire reinsurance firm CastlePoint Holdings Ltd CPHL.O for about $490 million in a cash and stock deal to increase its capital base and diversify its reinsurance business.

Based on Tower Group's Monday closing price of $23.09, the offer equals $12.68 for each CastlePoint share, representing a 43 percent premium to CastlePoint's Monday close of $8.88.

Tower Group, which had sponsored CastlePoint's formation, currently has a 6.7 percent stake in it. CastlePoint gets most of its premium revenue from Tower Group.

Under the terms of the acquisition deal, CastlePoint shareholders will get 0.47 of Tower shares and $1.83 in cash for each share held, the companies said.

Michael Lee, current chief executive of both Tower Group and CastlePoint, will be the chairman and CEO of the combined company.

After the deal, Tower Group expects 2009 earnings of $3.20 to $3.40 a share. Analysts expect the company to earn $3.38 a share, according to Reuters Estimates.

The deal, expected to close in December, will not require any external financing, the companies said.

Shares of Tower group were trading down 7 percent at $21.42, while those of CastlePoint were up 27 percent at $11.25 in morning trade on Nasdaq.

(Reporting by Sweta Singh in Bangalore; Editing by Vinu Pilakkott)