(Corrects to "private" market from "public" market in analyst's quote in paragraph 8)
* Enterprise value of deal is about $5.2 bln
* Offer of $14/shr for 65 pct stake Riverstone does not own
* Offer represents a 17.3 pct premium to Talen's Thursday close
* Shares up about 16 pct in early morning trading
By Amrutha Gayathri
June 3 (Reuters) - Electricity producer Talen Energy Corp said private equity firm Riverstone Holdings LLC will buy the remaining stake it does not already own in the company for about $1.8 billion, amid a string of deals in the U.S. power industry.
Talen Energy's shares were up nearly 16 percent in early morning trading on Friday.
Falling demand in both open and regulated power markets due to increased energy efficiency and a weak economy has led to several deals as U.S. power producers and utilities look to cut costs.
Talen was formed when Riverstone's generation assets were merged with Pennsylvania power company PPL Corp's merchant generation business.
Merchant power generation businesses sell power to wholesale markets, where prices are not regulated by the government.
Shares of Talen, which owns or controls 16,000 megawatts of generating capacity for wholesale power markets, in northeast, mid-Atlantic and southwest regions of the United States, began trading in May last year.
Riverstone will offer $14 per share in cash for the 65 percent stake it does not own, representing a 17.3 percent premium to Talen's Thursday close.
"Valuation is high compared with where Talen shares trade, but it's consistent with private market deals," Guggenheim Partners LLC analyst Shahriar Pourreza said.
"Stock hasn't fared well versus the other independent power producers," Pourreza said. "The assets aren't as great and likely better in hands of private equity."
Through Thursday's close, Talen shares had more than halved since May last year.
The agreement, which has an enterprise value of $5.2 billion, provides for a "go-shop" period of 40 days, during which Talen may enter into talks with parties that offer alternate proposals.
The deal is expected to be funded by converting Riverstone's existing stake into shares of the new company, Talen's cash on hand, and a $250 million secured term loan.
The power company would be required to pay a fee of $50 million to Riverstone if the agreement is terminated for a better proposal, but the fee will be reduced to $25 million if it accepts a superior proposal made during the go-shop period.
Pourreza said a new bidder is not likely to emerge.
Citi is Talen Energy's financial adviser for the deal and Kirkland & Ellis LLP its legal adviser. Goldman Sachs & Co and RBC Capital Markets are the financial advisers to Riverstone, and Wachtell, Lipton, Rosen & Katz and Vinson & Elkins LLP its legal advisers. (Reporting by Amrutha Gayathri in Bengaluru; Editing by Shounak Dasgupta)