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SYDNEY-Australia's cross-media and foreign ownership rules are being tested to the limit here in a battle of media giants, following Kerry Packer's declaration that he wants to own Australian newspaper group John Fairfax Holdings. At the same time, media baron Rupert Murdoch lifted his stake in Fairfax to about 7%.

Mr. Packer, Australia's richest man, already controls the top-rated National Nine TV network and a stable of top-selling magazines.

Although cross-media rules bind him to holding no more than 15% of Fairfax, he has pushed it to just short of 20%, the point where, under stock exchange rules, he must declare a full takeover bid. Mr. Packer argues that as long as he holds fewer shares than Conrad Black, the largest shareholder, he does not "exercise control" of Fairfax. The remaining 53% is held by small shareholders.

Mr. Black, a Canadian who also owns a string of newspapers in Canada, the U.S., the U.K. and Israel-including The Daily Telegraph in London, Chicago's Sun-Times and the Jerusalem Post -holds 25% of Fairfax, the limit set for foreign media investment. He has told the government he wants at least 35%.

Mr. Murdoch, Australian-born but who changed citizenship to U.S. status to circumvent U.S. cross-ownership laws, is regarded as a foreigner by the government. He has extensive local newspaper and magazine interests through his News Corp., as well as a 5% stake in Fairfax and another 5% in the Channel Seven network. Mr. Murdoch says he would like to increase both.

The government media watchdog Australian Broadcasting Authority immediately began a full-scale inquiry and will be reporting to the Federal Minister for Communications, Michael Lee, before the end of this month. Mr. Lee has several worst-case scenarios he is entitled to enact, including taking away Mr. Packer's broadcast license and fining him up to $2 million a day.

The battle has put Prime Minister Paul Keating and his Federal Government under intense pressure-on the one hand from politically powerful media giants who want him to serve their self interests, and on the other by public groups opposed to putting more media power in the hands of already powerful men.

Among those who do not want to see any of the three media magnates increase their stakes are many of Mr. Keating's own political party as well as groups such as "Friends of Fairfax," composed of staffers and the public.

Fairfax publishes the country's three most influential dailies-the Sydney Morning Herald, The Age and the Financial Review.

It was rescued from receivership in 1991 through a $1.2 billion buyout by Mr. Black following a disastrous privatization attempt by Fairfax heir Warwick Fairfax, who had bought out other members of his family. The bid failed following the 1987 stock market crash, bankrupting Mr. Fairfax.

Part of the government's dilemma is that any revision of the law to allow Mr. Packer to take control of Fairfax would also allow Mr. Murdoch to take control of Seven network.

A further complication is that Mr. Murdoch may soon become an Australian again while remaining an American, because the government intends to relax laws preventing Australian-born citizens from holding dual citizenship. This would allow him to own at least 15% of both Fairfax and Seven.

One result has been a public fallout between Mr. Packer and the Prime Minister, after Mr. Packer went on his own TV network's national affairs program to publicly attack the media rules and, by implication, Mr. Keating, while endorsing opposition leader John Howard, Mr. Keating's political opponent. The Prime Minister retaliated on the same program the following night.

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