June 22 (Bloomberg) -- Sirius Satellite Radio Inc.'s shares are ``undervalued'' because the company is unlikely to succeed in combining with larger rival XM Satellite Radio Holdings Inc. and offers a better product, Merrill Lynch & Co. said.

Sirius's takeover of Washington-based XM for stock valued at $3.64 billion is under review by U.S. regulators.

Shares of New York-based Sirius are cheap because they cost less than their $3.50 price range before the combination was announced and few investors expect it to win approval, Merrill analyst Laraine Mancini said in a note to clients today. Merrill gives the transaction a 60 percent chance of success, she said.

``The shares are oversold,'' said Mancini, who is in New York and rates Sirius shares ``buy.'' Mancini said Sirius still has good potential for adding paying subscribers by converting them from free service that dealers provide with some new and used cars.

Shares of Sirius rose 17 cents, or 6 percent, to $3.01 at 4 p.m. New York time in Nasdaq Stock Market composite trading. They have fallen 15 percent this year.

To contact the reporter on this story: Katie Hoffmann in New York at khoffmann2@bloomberg.net.

Last Updated: June 22, 2007 16:04 EDT