UPDATE 2-Polar Star Canadian to buy Tusk Energy

(Recasts; adds details, analyst comments)

By Krishna Chaithanya

BANGALORE, Feb 10 (Reuters) - Oil and natural gas producer Tusk Energy Corp TSK.TO agreed to be bought by Polar Star Canadian Oil and Gas Inc for about C$194.4 million ($159.2 million) in cash, in a deal that may trigger consolidation in the small and mid-size Canadian exploration and production sector.

Polar Star Canadian's C$2.15-per-share offer is 150 percent more than Tusk Energy stock's Monday closing price of 86 Canadian cents. Shares of Tusk Energy reached a high of C$2.11 on Tuesday.

"This deal highlights the undervalued nature of the (junior exploration and production) sector, which continues to trading at steep discounts to underlying net asset values, relative to historical market valuation metrics," National Bank Financial analyst Jeff Sears told Reuters.

Including debt, the deal is valued at about C$257 million, said Tusk Energy, which has about 90.5 million shares outstanding.

"We see the Tusk deal as a positive to the junior E&P sector, and believe that similar discounted market valuations on high-quality companies and asset bases could drive attractive shareholder returns with further consolidation through 2009," analyst Sears said.

Polar Star Canadian is a venture indirectly owned by financial services company Teachers Insurance and Annuity Association of America.

Under the agreement with Polar Star Canadian, Tusk Energy has agreed not to solicit or initiate any discussions concerning the pursuit of any other acquisition proposals.