Will the Sirius/XM Merger Affect Canadian Satellite Radio?

With the prospects of a merger approval between Sirius Satellite Radio (SIRI) and XM Satellite Radio (XMSR) improving stateside, so too are the prospects that Canadian Satellite Radio Holdings Inc., the Canadian partner of XM, and Sirius Canada will combine forces.

Shares in Canadian Satellite [XSR/TSX] jumped 5% on Wednesday morning following Tuesday's announcement that the U.S. Department of Justice has approved the merger between XM and Sirius, but with only 1,000 shares trading hands, its fair to say the market feels this story is long from over.

TD Newcrest analyst Scott Cuthbertson, meanwhile, upgraded his rating on Canadian Satellite from "hold" to "speculative buy," and raised his price target from C$6 to C$7.50.

In a note the analyst told clients that:

We believe that the approval by the Department of Justice will positively impact the forthcoming decision by the FCC and meaningfully increases the probability that a merger in the United States will ultimately be approved.

A merger in the United States would likely lead to a merger in Canada which would create value for shareholders of both Canadian Satellite Radio and Sirius Canada in our view.

Mr. Cuthbertson added that should a merger happen, he does not think it likely that Canadian Satellite shareholders will receive an all cash bid for their shares.

He wrote:

As in the United States, we think this would be a paper transaction, but unlike the U.S. deal, Sirius in Canada is a private company. Accordingly, we envision a reverse takeover whereby XSR issues a lot of shares to buy Sirius Canada.