Should investors get set for a media merger bonanza?

Contrarian investors should keep an eye on media stocks.

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Investment bankers at Macquarie Group Ltd (ASX: MQG) no doubt have a spring in their step after playing a role as advisors to upmarket department store owner David Jones Limited (ASX: DJS) on the just received $2.15 billion takeover offer. With top line growth still hard to come by, mergers and acquisitions (M&A) look set for a comeback as management teams choose acquisitive growth and synergistic mergers to boost revenue and earnings.

Yesterday’s Australian Financial Review highlighted the view of Commonwealth Bank of Australia (ASX: CBA) analyst Alice Bennett that media deals are in the offing and that in her opinion the 75% reach rule could likely be abolished.

With a number of media companies continuing to face headwinds, amalgamations certainly make sense. Bennett singled-out Southern Cross Media Group Ltd (ASX: SXL) as a potential target of newly re-listed Nine Entertainment Co Holdings Ltd (ASX: NEC), while also throwing cold water on any potential merger between News Corp (ASX: NWS) and Ten Network Holdings Limited (ASX: TEN) as getting the ‘no-go’ from regulators.

While Bennett didn’t see any imperative need for Kerry Stokes’ Seven West Media Ltd (ASX: SWM) to snap up rivals, given Stokes’ history of making opportunistic acquisitions such as the recent offer for oil and gas play Nexus Energy Limited (ASX: NXS), don’t be surprised if he isn’t busy behind the scenes sizing up media sector opportunities.

Foolish takeaway

Of course the unknown in all this M&A bonanza speculation is the regulatory authorities. While in the past regulators have aggressively defended the independence of media assets, thanks to the internet, the media world has changed significantly with the profitability of many media assets called into question. It’s possible the authorities would look more favourably on media tie-ups now than they have in the past.

As Fairfax Media Limited (ASX: FXJ) proved back in February when it reported a surprisingly good interim profit result, it doesn’t always require much good news to send an unloved stock up 50%. Investors prepared to take on some risk might want to keep an eye on the media sector for other unloved and out-of-favour investment opportunities.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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