UPDATE 4-Australia media tycoon Stokes forges $2 bln Seven takeover

* Deal valued at $4.1 bln, of which $2.1 bln is external debt

* WAN to issue $1 bln in new shares at discounted A$5.99 per share

* KKR to have 12.6 pct stake in new combined group

* Deal creates largest diversified Australian media group

* Seven Group shares jump 4 pct, WAN on trading halt (Updates shares, ACCC comment, detail)

By Michael Smith

SYDNEY, Feb 21 (Reuters) - Australian newspaper group West Australian Newspaper Holdings (WAN) has agreed to buy Seven Media Group for $2 billion, in a deal forged by tycoon Kerry Stokes that will create the country's biggest media company.

Perth-based WAN will buy Seven Media Group, whose assets include Australia's highest-rating television network, from Seven Group Holdings and private equity firm Kohlberg Kravis Roberts .

Media consolidation in Australia is gathering pace and this is the latest in a string of deals -- private equity firm CVC plans a $5 billion float of rival television network Nine Entertainment later this year, while Southern Cross media made a bid for radio group Austereo in January.

WAN plans to raise $1.08 billion in new capital to fund the deal, which will create a company with a market capitalisation of about A$3.6 billion -- Australia's biggest media company ahead of Fairfax .

Stokes, 70, a former Perth television antenna technician who is one of the country's most powerful businessmen and the existing chairman of WAN's board, is seen as the driving force behind the deal, which consolidates his Australian media operations. He will remain as chairman of the new group.

"He's been very successful. A combined traditional TV and digital media will probably be very competitive," said Tom Millner, Chief Executive at BKI Investment Co, one of WAN's top 10 investment manager shareholders.

"It'll have significant scale, and the cross-sell opportunities will be pretty significant."

Seven Group shares rose as much as 4 percent after the deal was announced and closed 2.3 percent higher at A$9.30. WAN shares, which closed on Friday A$6.34, were on a trading halt, while Australia's main index slipped 0.9 percent.

WAN, which wants to diversify from its newspaper-focused business into digital media, will take on A$2.1 billion of Seven's debt under the deal which is being funded by raising new capital, issuing preference shares.

KKR will hold a 12.6 percent stake in the new combined group, down from 45 percent held in Seven Media currently, while Stokes' Seven Group Holdings will hold 29.6 percent in the combined entity versus 45 percent in Seven Media.

The rest of Seven Media is owned by mezzanine investors and its management.

WAN said it would issue A$1.081 billion worth of its shares to Seven Group Holdings at A$5.99 a share, at a 5.5 percent discount, as well as A$250 million in convertible preference shares to fund the deal.

It would also repay a A$650 million loan Seven Media owes to Seven Group Holdings. The total outlay, including the A$2.1 billion of debt WAN will take on, is A$4.1 billion.

WAN would also conduct a placement of A$461 million of its shares to KKR and the mezzanine investors, raise an additional $653 million through a non-renouncable rights offer, and raise A$40 million in new WAN shares. That money would be used to pay down some debt and transaction costs.

MEDIA SECTOR CHANGING

Valuations on Australian free-to-air TV businesses have jumped following a raid on broadcaster Ten Network last year by billionaire James Packer and a turn in the advertising market.

Media consolidation is gathering pace in Australia. Australian broadcaster Southern Cross media made a A$741 million bid for radio group Austereo in January.

Australia's competition watchdog said it would review the proposed deal, but analysts do not expect any problems as Stokes' move comes ahead of other expected deals in the sector.

"Usually you see the first (deal) go through, then the next raises a few issues and the ACCC (Australian Competition and Consumer Commission) looks more closely. To be first cab off the rank has probably been a priority," Millner said.

KKR bought a 50 percent stake in Seven for A$3.2 billion in 2006 at the peak of the buyout boom and has since trimmed its stake to 45 percent following a period of losses that forced Stokes to write down his share holding in Seven Media to zero. KKR had long been rumoured to be close to exiting its stake in Seven.

Stokes hinted the new combined group had ambitions for growth outside regional Australia longer term.

"It might in the future look a lot bigger than regional Australia," he told analysts on a conference call.

UBS and JPMorgan advised Seven on the deal and O'Sullivan Partners was financial adviser to WAN. UBS and JPMorgan are joint lead managers on the share offer.

Seven owns one of Australia's big three commercial television networks and Pacific Magazines whose titles include Better Homes and Gardens, and online sites.

Stokes last year merged his holding companies to move further out of media through a merger of heavy equity firm WesTrac and Seven. He sold more than half his media interests to KKR in 2006. (Additional reporting by Sonali Paul in MELBOURNE; Editing by Balazs Koranyi and Dhara Ranasinghe)