The deal between Fairfax Media (ASX: FXJ) and Nine Entertainment Co (ASX: NEC) will be the biggest since Australia's cross-platform media ownership laws were relaxed in the last quarter of 2017.

The new entity will become the nation's largest media player. Nine will hold a controlling 51.1 per cent stake, and Fairfax will own the remaining 48.9 per cent.

Fairfax directors "will unanimously recommend Fairfax shareholders vote in favour in the absence of a superior proposal," according to newswire AAP.

The Fairfax Board has carefully considered the Proposed Transaction and believes it represents compelling value for Fairfax shareholders," Fairfax chairman Nick Falloon said in the statement.

Fairfax's share price was up 12 per cent on its opening price by midday, as news of the deal filtered through. At 86.25 cents a share, this is the stock's highest level in seven years - more than 20 per cent above Morningstar's fair value estimate (FVE).

By contrast, Nine's share price dipped 8 per cent to $2.31 by midday - a two-month low, but still more than 50 per cent above Morningstar's FVE.

Neither company are regarded as holding economic moats of competitive advantage.

Three current Fairfax directors will be invited to join the board of the combined business, which will be chaired by Nine Chairman, Peter Costello and two current Nine directors.

media nine-logo channel nine fairfax merger acquisition

Nine will own 51.1 per cent, under chairman Peter Costello and two other Nine directors.

While the deal itself comes as a surprise, there has been speculation about potential mergers within Australia's media landscape since the legislation change was first flagged.

Fairfax's share price has been particularly volatile in recent months, something Morningstar senior equity analyst, Brian Han, suggested may have been related to "conjecture about Fairfax's strategic intention".

"Although the share price has now settled at around our unchanged 70 cents a share fair value estimate," he said early last month.

At the time, Han noted Fairfax faced a "strategic dilemma" in either exploring other digital-based ventures to complement its successful Domain (ASX: DGH) and Stan businesses - or "paying up big for a traditional media business and take on the risk of integration and structural threats".

Domain is an online property portal, which was spun out as a separate ASX-listed entity earlier this year. The Stan streaming video on demand service is jointly-owned by Fairfax and Nine.

Han preferred the former course of action, but couldn't rule out Fairfax-led acquisitions, "given the recent repeal of the restriction on mergers in a licence area involving more than two of the three regulated media platforms, being television, radio and newspapers (the "2 out of 3" rule).


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Glenn Freeman is senior editor, Morningstar Australia.

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