While federal Communications Minister Stephen Conroy this morning sent shockwaves through Telstra by effectively demanding that the company separate its retail and wholesale division, he may have also sparked a three-way fight between Australia’s three great media moguls — Rupert Murdoch (well, he’s sort of Australian), James Packer, and Kerry Stokes — by announcing the government wants Telstra to sell its 50% stake in Foxtel.

Australia’s growing love of pay TV — subscriber numbers rose 8% to 1.63 million in 2008-09 — has made a Foxtel one of the most sort-after assets in the Australian media sector.

Indeed, this was seen as the big reason that Kerry Stokes’ Seven Network snapped up just under 20% of James Packer’s Consolidated Media in July: ConsMedia owns 25% of Foxtel and a stake in pay-TV content producer Premier Media.

Today’s announcement should make Consolidated Media a prime takeover target for Stokes, Packer (who owns just over 40%) or another interested party, such as Rupert Murdoch, whose News Corporation owns the other 25% of Foxtel. If Stokes, Packer or Murdoch could grab Telstra’s 50% stake, and then take out Consolidated Media, they could grab a stranglehold on Australia’s pay-TV market.

This would also set up one of the greatest media mogul battles Australia has ever seen.

Given this, you might have thought ConsMedia’s shares would have soared today. They haven’t — at 11:45am, the shares were up just 2.4%.

Part of the reason might be the little deal that Packer and Stokes did last week, whereby Packer gave Stokes two seats on the ConsMedia board in exchange for a promise that Seven Network would not buy any more shares in ConsMedia for the next 12 months.

The standstill agreement is subject to “certain exemptions”. The only problem, as Bryan Frith points out in The Australian today, is that no one knows that those exemptions are.

For example, does the fact that Telstra’s Foxtel stake may soon be up for grabs constitute one of those “certain exemptions”?

If so and the standstill agreement no longer stands, then Stokes could well be tempted to launch a full takeover bid for Consolidated Media, which would almost certainly push the company’s share price a lot higher than 2.4%.

And if the sale of Telstra’s Foxtel stake doesn’t constitute an exception to Stokes’ standstill agreement, then the minority shareholders in Consolidated Media — that is, all of those investors not named James Packer — are entitled to ask whether the standstill agreement was really in their best interests.

Shares graph comments:

Telstra — Government wants it separate its retail and wholesale divisions and potentially sell its 50% stake in Foxtel. Investors are clearly unimpressed with the announcement and will be waiting to see management’s reaction.

Consolidated Media — James Packer owns more than 40%, Kerry Stokes’ Seven Network owns just under 20%. As the owner of a 25% stake in Foxtel, Consolidated Media might become a prized asset if Telstra’s Foxtel stake is put on the market.

Seven Network — Kerry Stokes could look to force his way into the pay-TV sector by trying to buy Telstra’s Foxtel stake or by launching a full takeover for Consolidated Media — or both.

News Corp — Rupert Murdoch’s News Corp already owns 25% of Foxtel, but would no doubt love to get a more. Would be a possible bidder for Telstra’s stake if it came on the market.