Canadian Hydro Developers Inc. agreed to a takeover by power producer TransAlta Corp. on Monday, ending a lengthy courtship.

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Three-month stock chart for Canadian Hydro.

The deal values Canadian Hydro at $1.6 billion.

TransAlta first announced its pursuit of the smaller energy firm in July, when it launched an unsolicited bid that valued the company at $654 million. The original offer expired at the end of trading on Friday.

Canadian Hydro CEO Kent Brown repeatedly dismissed that offer, calling it inadequate and claiming the company had numerous other suitors who were willing to pay more. The company implemented a poison pill to try to rebuff the offer and buy more time.

TransAlta's offer has the unanimous support of both boards, but still requires the approval of 66 per cent of Canadian Hydro shareholders. Details of the offer will be mailed to existing shareholders by Oct. 20.

The company will pay for the transaction through a combination of cash, debt and a new equity issue of $350 to $400 million.

Move to renewables

Much of TransAlta's power assets depend on coal, which leaves a deep environmental footprint. The company also has a handful of natural gas and wind-powered plants, but has been trying to beef up its portfolio with hydroelectricity, which is considered to be more renewable.

Michael McGowan, vice-president of equity research at BMO Capital Markets, told CBC News he considers the price fair, if a little higher than he expected. He predicted the takeover would start making money for TransAlta in 2011.

McGowan says the main thing the deal does is provide potential for TransAlta to expand into more renewable energy projects, by expanding or acquiring more assets that complement those Canadian Hydro already has.

If the deal is approved, the combined company would have a total energy output of 8,657 megawatts, of which 1,900 megawatts or 22 per cent would come from renewable sources such as wind.