TransAlta Corp said on Monday it has reached a deal to buy renewable energy producer Canadian Hydro Developers after raising its takeover offer to C$5.25 a share.

Just after markets opened, Canadian Hydro shares rose 21 Canadian cents, or 4.2 percent, to C$5.22 on the Toronto Stock Exchange, while shares of TransAlta eased 10 Canadian cents to C$21.02.

TransAlta, Canada's biggest investor-owned power producer, said the cash deal has a total value of C$1.6 billion.

The company initially bid C$4.55 a share for Canadian Hydro in July, a offer that Canadian Hydro rejected as insufficient.

Canadian Hydro's shares have traded well above the original offer price for the last three months, indicating shareholders expected a sweeter bid.

The companies said the amended offer has the unanimous support of both boards of directors.

($1=$1.08 Canadian)

(Reporting by Cameron French; editing by Peter Galloway)