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Will merger fever reignite as regional media stocks get hammered today?

A shocking trading update from regional broadcaster Prime Media Group Limited (ASX: PRT) could hasten consolidation in the media sector as the stock slumped to a six-year low.

News that the group’s total advertising revenue for the first two months of the current financial year has fallen 6.9% has sent Prime Media plunging 13.9% to 52.5 cents during lunch time trade and its regional peer Southern Cross Media Group Ltd (ASX: SXL) sinking 5.3% to 89 cents in sympathy.

We know the advertising market is under pressure but the extent of the decline is shocking and certainly raises doubts about whether conditions are bottoming after Prime Media managed to deliver a 3.2% improvement in earnings before interest, tax, depreciation and amortisation (EBITDA) to $66.9 million when it released its full-year result last month.

Management tried to put a positive spin on the disappointing update by stating that it is actually winning market share. While Prime Media’s key markets of regional Victoria and northern and southern New South Wales shrunk 3.4%, the group’s national agency revenue fell a more modest 2.6%, according to data from the Standard Media Index (SMI).

Regardless, the news is hard to swallow particularly given that metropolitan television’s national agency revenue is up 2% in July and 0.7% in August.

Prime Media also added that the poor result for September has been exacerbated by the AFL Grand Final being scheduled in October this year.

“There is a general lack of confidence among regional advertisers due to poor consumer sentiment, which in turn has resulted in a very short market with limited visibility,” said Prime Media’s chief executive officer, Ian Audsley.“Markets dependent upon mining activity are the most affected, particularly regional Western Australia.”

One has to wonder if regional newspapers owned by Fairfax Media Limited (ASX: FXL) are also feeling the pinch. I have a feeling they are.

But someone’s pain could be someone else’s gain. Media groups that operate metropolitan broadcasting assets like Nine Entertainment Co Holdings Ltd (ASX: NEC), Seven West Media Ltd (ASX: SVM) and Ten Network Holdings Limited (ASX:TEN)  are probably watching this development with great interest.

These companies are keen on merger opportunities with their regional peers if media ownership restrictions are loosened or removed as the market expects.

I suspect once the dust settles we could be stuck with maybe two listed media groups with significant free-to-air television assets.

History has shown that the best way to make money from this thematic is to try to pick the targets, not the bidders.

But buying stocks just for their takeover value is usually not a sound strategy for retail investors, and as Prime Media’s share price crash today shows, investing in the sector is only suited for those with a strong stomach for volatility.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. Follow me on Twitter - https://twitter.com/brenlau

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.