UPDATE 3-Tower Group to buy Specialty Underwriters' for $107 mln

* Deal for $107 mln in stock

* Offer at a premium of 70 pct

* Tower sees 2010 EPS $3.50-$3.70

* Specialty Underwriters' shares rise 60 pct (Recasts; adds details, analysts' comments, updates share movement)

By Supantha Mukherjee BANGALORE, June 22 (Reuters) - Insurer Tower Group Inc (TWGP.O) said it agreed to buy Specialty Underwriters' Alliance Inc SUAI.O for about $107 million in stock to develop its specialty business and expand in the U.S. Midwest.

As per the agreement, Specialty Underwriters' shareholders will get Tower stock worth $6.72 for each share they own. The offer is at a premium of about 70 percent over Specialty Underwriters' closing price of $3.96 on Friday.

Specialty Underwriters' shares were up $2.23 at $6.19, while shares of Tower were down 4 percent at $23.07 in Monday afternoon trade on Nasdaq.

"It's a really a good acquisition (for Tower) because Specialty Underwriters' was trading far below book and it was definitely very undervalued," Polestar Investment Research LLC analyst Raj Sharma said.

While on the surface it appears that Tower is paying a discount, they may have overpaid, Piper Jaffray analyst Michael Grasher said.

"It is unclear what the actual balance sheet at Specialty may look like down the road and how their liabilities develop," Grasher said.

Last year, Specialty Underwriters' snubbed an all-stock takeover offer, valued at $6.50 a share, from its second-largest shareholder Hallmark Financial Services Inc (HALL.O), leading to a proxy battle.

"The offer is not much different in terms of stock price, but in terms of the company, Tower is a better company," analyst Sharma said.

Hallmark, a Fort Worth, Texas-based insurance holding company, holds a 10 percent stake in Specialty Underwriters'.

"If they wanted to get aggressive and hostile in this situation, they would probably be lobbying other shareholders to examine what is really the value driven here," analyst Grasher said.

The analysts believe that Hallmark may also consider the option of a counter offer.

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