David Gyngell's (left) successor Hugh Marks appears to be keeping all his options open. Credit:Daniel Munoz There is a catch. Despite popular perceptions that law changes this year will trigger a rush of takeovers, most industry leaders say even beaten-down media stocks are not yet cheap enough to trigger the deals needed to create one or two media conglomerates. If prices fall further, they say two groups centred on News Corp and Foxtel, and Fairfax Media and Nine Entertainment, is the likeliest outcome. Digital entrants Many close observers of the Australian media industry would have you believe the corporate landscape is about to be reshaped by a wave of mergers and acquisitions. And with the government on the cusp of scrapping Keating-era ownership restrictions, that seems perfectly rational – particularly if you believe a radical reorganisation is what traditional players need to compete with unregulated digital entrants such as Google and Netflix.

But many observers have been confidently predicting a frenzy of deal-doing for the best part of a decade. While the flow of transactions has been steady – proving regulatory changes are not the only catalyst – the forecast M&A tsunami has failed to materialise. For every prediction that "this will be the year", there is a compelling argument that few of the much-touted tie-ups will ever come to fruition, regardless of whether the government makes it easier to launch a takeover. Media heavyweights Kerry Stokes and Rupert Murdoch flank AFL Commission chairman Mike Fitzpatrick at the recent announcement of a $2 billion Foxtel deal. Credit:Simon O'Dwyer As one media executive put it, merging two traditional media businesses that are under stress would be "like using desert spoon to fill a hole being created by a shovel". Fairfax Media spoke to investment bankers, investors, analysts, company directors and executives, many of them in private, to hear all sides of what is always a spirited debate. News Corp executive chairman Rupert Murdoch. Credit:Simon O'Dwyer

Early this year, Communications Minister Mitch Fifield is expected to propose the abolition of two rules that date back to a pre-internet time when newspapers, TV and radio still had a stranglehold on the advertising market. First, there is the so-called "reach rule", which limits audience reach for a television network to 75 per cent of the population. Two-out-of-three rule Scrapping the rule would allow the metropolitan free-to-air network owners – Nine Entertainment Co, Seven West Media and Ten Network Holdings – to merge with or acquire any of the regional networks, WIN Corporation, Prime Media or Southern Cross (which also owns radio assets). Then there's the "two-out-of three rule", which stops any one group or person from controlling more than two newspapers, commercial TV licences or radio licences in a major market.

Ditching this rule would – for instance – make it legal for Fairfax Media, owner of newspapers such as the Financial Review and a controlling stake in radio group Macquarie Media, to merge with, acquire or be acquired by Nine, which has the second-placed metropolitan free-to-air network. Abolishing the rule would allow the dominant newspaper owner News Corp, whose co-chairman Lachlan Murdoch owns radio group Nova Entertainment through his private investment vehicle Illyria, take control of TV broadcaster Ten Network Holdings (in which News Corp's pay TV joint venture Foxtel acquired a 15 per cent stake in late 2015, the maximum allowed under current rules). Many of those who say 2016 could spell media merger frenzy believe the Murdoch empire's ever-expanding reach will force its local competitors to team up. News was active in 2015 in terms of local corporate activity. It acquired separate 15 per cent stakes in Ten (via Foxtel) and the newspaper, radio and outdoor advertising business APN News & Media. The move gave it a toehold in two additional media – free-to-air television and outdoor advertising. Ten's advertising is now sold alongside the Foxtel's by the Foxtel's sales arm Multi Channel Network (MCN), which has improved Ten's leverage with media buyers.

Force a roll-up That has also stoked nagging concerns among rivals that a further-expanded News Corp could – if it came to pass – become a one-stop-shop to advertisers. It's a proposition some, though not all, in the media are convinced will ultimately force a roll-up of Fairfax, Nine and Southern Cross (or WIN Corp). They argue that the former trio would command as much as 20 per cent of the advertising market. But the chances of such a three-way tie-up looked very distant at the time of writing. Not only has Fairfax repeatedly said it has no interest in Nine, but its majority holding in Macquarie Media already gives it a powerful position in radio, which can't be ignored. Former Nine chief executive (and current Nine board director) David Gyngell has expressed no appetite for print, and several Fairfax board directors have little appetite for free-to-air TV, believing it is on the edge of a structural crisis similar to the one their print titles have endured for the past decade.

Meanwhile, Nine's on-off takeover talks with Southern Cross hit a brick wall in November after the latter's share price spiked to a point where the deal became unjustifiable for Nine on valuation grounds. Southern Cross has been in no hurry to re-start discussions - preferring to focus on opportunities for its more defensive radio business - and as revealed by afr.com on Monday, Nine is prevented from re-engaging with it until the end of February (assuming it wanted to) due to a three-month exclusivity period negotiated years ago by Southern Cross's affiliate Ten. David Gyngell's successor Hugh Marks appears to be keeping all his options open on potential M&A (perhaps unsurprisingly for a new CEO) while some other executives insist consolidation is inevitable as the market continues to contract and digital players led by Google take an ever greater share. Ten chairman David Gordon is among them. He points out that TV content costs as a whole are rising: Ten has warned its content costs will rise 6.5 per cent during 2016 financial year (its bigger competitors Seven and Nine have committed to spend billions on blockbuster sports rights deals with the NRL and the AFL in coming years). Content creation

"We play in a huge market and we are small player. I think consolidation in the industry is inevitable in one form or another," Gordon told Fairfax Media on the sidelines of the Ten annual meeting in December. "You need to have bigger and bigger balance sheets to be able to support the creation of content that more and more people want to look at." The cross-media rules make it harder for the likes of Ten to fight companies with massive balance sheets, he added, pointing out that "Apple has more cash on its balance sheet than the market capitalisation of every (listed) media business in Australia combined". And yet investors, already scarred by the poor performance of traditional media stocks, would need much convincing to approve deals, be they takeovers or nil-premium mergers. They would need to see a complimentary fit between the assets and an ability to generate leverage through cross selling, market positioning and scale. Some experts see free-to-air TV and radio as a natural fit in this regard. But sceptics note there is no notable example of a combined free-to-air/print/radio company – including in the world-leading United States market – and no successful combined print and TV newsroom operation of any significant scale. On the face of it, a combined Fairfax, Nine and Southern Cross would have around $3 billion of costs. Stripping some of that out would postpone their combined shrinking earnings profile from traditional media.

But opinions diverge about the potential cost savings that could be generated from merging back-office functions and trimming middle management teams in such a deal. Fairfax, for its part, is very comfortable with its existing position: its print earnings have been re-based and real estate advertising powerhouse Domain makes up the lion's share of the company's value. Fairfax has one of the sector's strongest balance sheets and a relatively robust share price. It has invested with Nine in Stan, a 50: 50 subscription video-on-demand (SVOD) joint venture which is having a crack at taking on Netflix and is some way from profitability. Portentous expansion But Fairfax is not dying to jump into bed with another traditional player, preferring to control its publishing costs and expand into growth areas such as events and a 50:50 joint venture between 112, which owns themotorreport.com.au, and Fairfax's Drive.com.au.

And while some see News Corp's recent expansionism as portentous, other rivals inevitably snipe that Foxtel's cash injection into Ten looked more like Rupert Murdoch bailing out the company, in which his son Lachlan was formerly CEO and still has a stake. Those doubters also believe News Corp Australia has many more cost cuts to make in its print operations, point out that the APN share price has halved since News' move on it March, and note that Foxtel is under pressure from cheaper streaming rivals led by Netflix. The News Corp threat, they say, is over-stated. There remains one unknown quantity in all of this: the Bermuda-based billionaire Bruce Gordon. He owns 100 per cent of WIN Corp, 14.95 per cent of Ten and – since October - 14.95 per cent of Nine. You might say he holds the wild card. The wily 86-year-old remains a major fan of free-to-air TV - despite the doomsayers who say that Netflix will eat its lunch. On December 23, Fairfax's business news websites revealed that Nine had opened exploratory takeover talks with the regional network WIN Corp during crunch talks about their 27-year-old affiliation partnership.

They have since struck a six-month extension to that partnership, which has the happy effect of allowing time for Parliament to scrap the reach rule while giving Nine (and WIN) the option of other dance partners. Dance partners It's no coincidence that Southern Cross's affiliation with Ten also expires on June 30: all four parties will now have what bankers call "optionality" when it comes to potential dance partners. Some believe Gordon's ultimate goal is to vend WIN into Nine and get a bigger stake in the metro broadcaster. His actual intentions are anyone's guess. Another key player is Kerry Stokes' Seven West Media, which has aligned itself with News through its 50: 50 SVOD joint venture Presto.

Seven had a rough 2015 as fears about its debt and the future of free-to-air TV added to concerns about its exposure to declining legacy print assets through West Australian Newspapers and Pacific Magazines. It has expressed no desire to acquire its regional affiliate Prime Media, with whom it has an agreement until 2018. For all of its issues, Seven still has the best-performing free-to-air network, although Stokes has told shareholders that improving the share price over the next 12 months is a top priority. Seven chief executive Tim Worner told the annual meeting in November he is looking at the media sector and beyond for expansion: "We're certainly looking at areas of adjacency. We're looking at companies we think we could add value to by bringing enormous promotional grunt. We're also looking inside the media sector." Some speculate that Mr Stokes' Seven Group Holdings, which has a controlling stake, could seek to Seven West Media private with the help of a private equity partner. Another theory says Seven West Media could move on Lachlan Murdoch's Nova Entertainment, which German media giant Bauer has been circling.

Lobbying like hell Whereas Seven has been resistant to proposed media reforms until recently, the three commercial regional networks have been lobbying Canberra like hell to scrap the reach rule and the two-out-three rule. Many observers say the writing is on the wall for regional broadcasters and that their primary motivation is to get bought before the national broadband network undermines their business model (pressure is certainly mounting now that Seven, soon to be followed by Nine, has begun streaming its channels direct to the regions over the internet). They argue that the regionals still don't look cheap given their challenged earnings outlook and say Seven and Nine would be better continuing to spend their money on content initiatives, such as Seven's fast-growing production arm and Nine new lifestyle channel Nine Life. Ultimately though, as with any of these potential deals, price is price. "If things get too cheap, everyone starts saying actually this is silly, something has to happen," says one senior media executive.

When that will be is anyone's guess according to contrarian investor Simon Mawhinney, chief executive of Allan Gray Australia, which has 16 per cent stakes in both Southern Cross and APN News & Media, and less than 5 per cent of Fairfax. "Who knows? We certainly don't," he says. "We think it's generally a very bad reason to invest in this space if your investment thesis is predicated on some form of takeover activity. "So we tend not to obsess about it. "You chase your tail around a lot. At end of the day all that happens is you get dizzy."