Kerry Stokes wants to tighten his hold on the the Seven Network, and position himself for further expansion in the next couple of years, by selling his huge WesTrac equipment sales and distribution business in China and Australia into Seven in exchange for a controlling interest in the expanded group.

The move will take Seven away from media, but will, when complete, give the company the firepower to launch a bid for media groups such as Consolidated Media, Austar, or half of Foxtel if Telstra wants to sell.

In fact, the WesTrac assets, cash flow and earnings will make Seven a much more formidable company in Australia. WesTrac has gone as far as it can here and would face ACCC problems while Seven would fancy its chances of snapping up a pay-TV asset, ACCC permission willing.

Stokes this morning told a briefing that the combined balance sheet of Seven Network and WesTrac would allow the new company to “do anything it wanted to” in the media.

Stokes said the company was keen on CMJ (Consolidated Media) and hoped to expand that.

And Peter Gammell, Stokes private CEO and the putative head of the merged company, said “we are still keen on the growth prospects of media … we still think it’s a great business.” But Gammell said he had no plans to do anything because of the standstill agreement.

Stokes’ bitter rivals at News Ltd would now be a smaller operation in this country and are constrained by its dominant position in a declining business, newspapers.

Stokes already owns 48% of Seven Network Ltd, which controls 47% of Seven Media Group (with executives holding about 3%).

Now, in exchange for backing WesTrac and its $2 billion a year of sales into Seven, Stokes and his family interests will emerge with a controlling 68%.

In effect he is giving up 100% control of WesTrac and de facto control over Seven in exchange for control of the merged companies, with minorities accounting for about 32%.

Seven justified okaying the WesTrac deal with this comment in the release:

“The Seven directors have conducted a comprehensive review of potential media and telecommunications segment transaction opportunities for Seven and have concluded that the value-enhancing opportunities are limited. The independent directors believe that the merger will alleviate market concerns related to re-investment risks, and will reduce or eliminate the value discount currently applied to Seven’s share price.

“The transaction substantially repositions Seven from an investment holding company to part of a diversified operating group owning market leading businesses with attractive growth outlooks, while retaining full upside to existing strategic investments. The merger provides access to assets that underpin a long term growth profile via exposure to Australian resources and the Chinese economy.”

The only possible media deals Seven could do would be to takeover all of West Australian newspapers. But Stokes would be reluctant to do that  because he already has effective control via a 23.4% stake and two board seats. Seven has 22% of Consolidated Media, but can’t do anything because of a standstill agreement with James Packer until later this year.

That gives Seven time to complete this deal, bed it down and then look for new targets.

The joint company will have borrowings of just over $1 billion, with all but $40 million of that being debt from WesTrac.

But Seven Network Ltd has just over $1 billion of cash in its balance sheet and about $600 million of that will be used to repay some debt in WesTrac.

This doesn’t take into account the $3 billion or so of debt in Seven Media Group that was loaded on when KKR bought in several years ago.

The new group will be called Seven Group Holdings Ltd, it will be listed on the ASX and long-time Stokes’ right-hand man, Gammell, will be CEO.

Gammell is managing director of Stokes’ private vehicle, Australian Capital Equity Pty Ltd (ACE), and a director of Seven.

Seven said the parties had agreed WesTrac to have an enterprise value of $2 billion, comprising equity value of $1 billion and assumed net debt of $1 billion.

The announcement was preceded by the interim profit results of the Seven Network Ltd. They were immaterial to the bigger story.

However, what wasn’t immaterial was the appearance of partial reversals of asset impairment charges taken a year ago when the outlook for business, especially the media, looked tough. The charges saw the Seven Network’s half share in Seven Media Group written down to zero, and a cut in the value of its 24% stake in WAN.

Now some of those cuts have been reversed. They will inject more “value” into Seven Network Ltd ahead of the merger with WesTrac, making it fairer for existing shareholders.

Meanwhile, SmartCompany editor James Thomson writes:

Kerry Stokes might own a big share in Australia’s top-rating commercial television channel, but this morning he and the independent directors at Seven Network have highlighted just how quickly the value of that once-prized asset is decreasing.

Stokes’ decision to merge his WesTrac heavy-equipment business — its main asset is the rights to distribute the Caterpillar brand in parts of Australia and China — with his already listed media interests can be taken as a signal that conditions in Australia’s media industry are unlikely to improve any time soon.

The key line in the Seven statement on the deal was this: “The Seven directors have conducted a comprehensive review of potential media and telecommunications segment transaction opportunities for Seven and have concluded that the value-enhancing opportunities are limited.”

In other words, don’t be fooled by Seven’s decision to write up the value of its stake in the private equity joint venture Seven Media Group from zero to $380 million today. Seven’s media interests will continue to be reasonable assets, but Stokes and his team might have just about run out of ways to find growth in this sector.

The WesTrac business is likely to dominate the newly merged entity, to be known as Seven Group Holdings.

According to the presentation made to investors today, WesTrac will account for a staggering 97% of the merged entity’s revenue in the 2011 financial year, which is forecast at $2.8 billion.

While Seven Group Holdings will retain the name of the famous television channel, make no mistake — this will be a heavy-equipment business that just happens to have a few investments in the media sector.

Just as James Packer orchestrated his big switch out of media and into gaming, so too has Stokes changed the game.

Exit Kerry Stokes the media mogul, enter Kerry Stokes the mining baron.