By Sinead Carew
NEW YORK, Feb 20 (Reuters) - Shares of Pegasus Communications Corp. rose more than 14 percent on Thursday as investors speculated that DirecTV could decide to buy Pegasus as part of a litigation settlement.
Loss-making satellite broadcaster Pegasus is in mediation talks with DirecTV in a effort to settle prolonged litigation concerning Pegasus' license for rural franchises of DirecTV's satellite broadcast services.
Pegasus, which saw its shares close up $2.34 to a nine-month high of $19 on the Nasdaq on Thursday in heavy trade, said that current interest in its stock was linked to a recent Credit Suisse First Boston report suggesting that the time is right for DirecTV to buy Pegasus.
The stock is up 41 percent since the report was issued.
"We are currently in mediation to settle our litigation. Settlement could take any form including settling the individual issues that are the subject of the litigation or anything else, which could include a merger or an acquisition," said Pegasus spokesman Andrew Smith.
A DirecTV spokesman would not comment on the mediation or the Pegasus stock move.
S.G. Cowen analyst Thomas Watts also said he believed the stock activity was spurred by the idea of DirecTV buying Pegasus.
It would be in DirecTV's interest to come to a resolution with Pegasus soon, Watts said, since General Motors Corp. is currently considering the sale of its stake in DirecTV's parent Hughes Electronics Corp. .
"Hedge funds have started talking about it in the last few days," Watts said. "DirecTV is in discussions right now for a buyer. The litigation could affect how much money it gets."
CSFB's Carmichael said in a research note that DirecTV should buy Pegasus to clear uncertainties surrounding the litigation, which is scheduled for a court trial on June 3 unless an agreement is reached first.
"In our view, the uncertainty surrounding the outcome of DirecTV's litigation with Pegasus represents a material overhang on the (Hughes) stock," said Carmichael.
He added an acquisition of Pegasus could create value for Hughes shareholders and improve DirecTV's competitive position.
Hughes stock closed up 8 cents at $10.10 on the New York Stock Exchange on Thursday.