The Los Angeles Times reported Monday Santa Monica, Calif.-based Lionsgate is in advanced talks to merge with Starz, according to four people with knowledge of the matter who were not authorized to speak publicly. Starz surged 10% in after-hours trading after closing regular trading up 4.1% at $39.
Starz shares have climbed 32% this year in large part because of takeover speculation. In February, Starz's largest shareholder, John Malone, the billionaire mogul who controls Liberty Media (LMCA) , nabbed a seat on Lionsgate's board. Lionsgate exchanged 3.43% of its stock for 4.51% of Starz shares, held by Malone. His stake in Starz dropped to 6% from 11%.
According to the LA Times, Starz and Lionsgate have held high-level talks for several months but a deal may not take shape, according to a senior company official who wanted to remain anonymous. The New York Post reported over the weekend speculation about companies ranging from Jeff Bezos' Amazon (AMZN - Get Report) to AMC Networks (AMCX - Get Report) looking into buying Starz, which has been ramping up original scripted TV content ranging from fantasy fare Outlander to urban drama Power.
A Starz spokeswoman on Monday told TheStreet, "As a matter of corporate policy, we do not comment on speculation or rumor." Lionsgate declined to comment.
A merger between Lionsgate and Starz would benefit both companies. Lionsgate, known for its burgeoning TV production side, whose hit shows include newly ended 1960s drama Mad Men for AMC and prison hit Orange Is the New Black for Netflix (NFLX - Get Report) , another venue for its output could boost profits. With its Hunger Games movie franchise ending in November with the release of final installment Hunger Games: Mockingjay - Part 2, another source of money-making -- Starz's 57 million pay-TV subscribers and $1.7 billion revenue -- would be ideal.
Despite Lionsgate's films being with Starz competitor Epix, the movie channel Lionsgate co-owns with Viacom (VIA - Get Report) . and MGM, eventually Starz could gain access to that treasure trove of tent pole movies. So too has Starz aimed to bump up its programming following Disney's (DIS - Get Report) decision not to renew its output agreement.
The LA Times reported one complicating factor is the varying valuations of the companies, with Wall Street estimating Lionsgate's worth at $5.7 billion compared to Starz' valuation of $4 billion. Starz Chief Executive Chris Albrecht, a former head of HBO, will reportedly have an important position if a merger goes through, according to an LA Times senior-level source.