NEW YORK (TheStreet) -- Shares of Lions Gate Entertainment  (LGF) are up by 2.35% to $40.10 in mid-morning trading on Tuesday, following reports that the movie and television studio is engaged in talks to merge with premium cable TV network Starz (STRZA).

The two companies have held high-level talks for several months, discussing various partnership opportunities, according to the Los Angeles Times.

One of the stumbling blocks to a tie up between the two companies is the difference in their valuation.

Starz, home of the popular television series "Power", has a market cap of about $4 billion while Lions Gate, the movie studio that produced the "Hunger Games" series, is valued at nearly $6 billion.

Also jeopardizing a potential deal is Lions Gate's co-ownership of movie channel Epix with Viacom (VIAB), according to the Times.

Lions Gate would not be able to merge Epix with Starz, as the two channels are competitors, without the consent of its partners.

Starz shares are up  by 2.25% to $39.95 this morning.

Separately, TheStreet Ratings team rates LIONS GATE ENTERTAINMENT CP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

We rate LIONS GATE ENTERTAINMENT CP (LGF) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its expanding profit margins, notable return on equity and solid stock price performance. We feel its strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • LIONS GATE ENTERTAINMENT CP's earnings per share declined by 13.3% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, LIONS GATE ENTERTAINMENT CP increased its bottom line by earning $1.24 versus $1.02 in the prior year. This year, the market expects an improvement in earnings ($1.50 versus $1.24).
  • 43.68% is the gross profit margin for LIONS GATE ENTERTAINMENT CP which we consider to be strong. Regardless of LGF's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 9.94% trails the industry average.
  • LGF, with its decline in revenue, underperformed when compared the industry average of 6.4%. Since the same quarter one year prior, revenues slightly dropped by 9.0%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Media industry and the overall market, LIONS GATE ENTERTAINMENT CP's return on equity exceeds that of both the industry average and the S&P 500.
  • You can view the full analysis from the report here: LGF