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The probability that XM Satellite Radio (XMSR) and Sirius Satellite Radio (NASDAQ:SIRI) will attempt to merge within the next 18 months is 75%, according to Kit Spring, an analyst at Stifel Nicolaus. “Our conviction is based mainly on Mel Karmazin’s track record and a compelling risk/rewardtrade off,” he wrote in a research note this morning. “We have dug through the 10Ks and rediscovered that Karmazin-led companies conducted over 20 major M&A transactions, totaling nearly $80 [billion].”

Spring puts the probability that a combination of the two satellite radio companies could win approval from both the FCC and Justice Department at 55%-60%, “with market definition as the key variable. It really comes down to whether terrestrial radio and to a far lesser extent the [Apple (NASDAQ:AAPL)] iPod are considered as competitors - there are pros and cons to the merits of each.”

A merger of the two companies could create $7 billion in shareholder value, Spring asserts. He sees “dramatic expense synergies” from a combined company.

Spring has Buy ratings on both stocks. Today he raised his price target on XM to $18 from $16.

“Absent a merger, we believe the business models of both SIRI and XMSR are viable if the companies can increase the penetration rate in new cars from ~20% now to ~70% by decade-end - a scenario in which we remain believers,” he wrote.

XM is down nearly 6% today while Sirius is off 3.5%.

XMSR-SIRI 1-yr comparison chart:

XMSR-SIRI 1-yr comparison chart

Source: Analyst Asserts: Strong Chance of XM-Sirius Merger in Next 18-Months