* Fairfax shareholders to receive Nine shares and cash
* Nine offer a 22 pct premium to Fairfax's last close
* Fairfax chairman says deal represents "compelling value"
* Fairfax shares hit 7yr high, Nine shares touch 8wk low (Updates shares, adds analyst quote and background)
By Tom Westbrook
SYDNEY, July 26 (Reuters) - Newspaper publisher Fairfax Media Ltd said on Thursday it had agreed to a A$2.16 billion ($1.6 billion) buyout from television network Nine Entertainment Co Holdings Ltd, in one of the biggest shake-ups in Australian media for decades.
The deal marks the end of an era for the 177-year-old publisher of the Sydney Morning Herald and Australian Financial Review, which will give up the name of founder John Fairfax under the arrangement with the free-to-air broadcaster.
It would make Nine the biggest media company in the country, ahead of News Corp's Australian arm, although some shareholders were not impressed and the company's stock fell 10 percent to an eight-week low after the announcement.
"If I was a Nine shareholder I'd probably want to see them buying something new-world," said Ashok Desai, associate director of brokerage CPS Capital.
Patrick Potts, an investment analyst at fund manager Martin Currie Australia which has stakes in Fairfax and Nine, said however the combination of a publisher and a broadcaster "makes a lot of sense".
"Being able to sell an advertiser an audience across the day, across different channels is hopefully going to be pretty attractive to ad buyers," he told Reuters.
Fairfax shares jumped 13 percent to trade in line with the Nine offer at a 7-year high, while shares in Fairfax-controlled real estate listings company Domain Holdings Australia Ltd also surged.
The deal comes as media incumbents around the world splash billions of dollars to buy the scale they need to rival Facebook and Google in the quest for advertising dollars.
Australia's relaxation of cross-ownership laws in 2017 to allow easier mergers of publishers and broadcasters with overlapping metropolitan audiences is expected to unleash further rationalisation of the sort already under way in other developed media markets.
The liberalisation prompted News's co-chair, Lachlan Murdoch, to make an offer in September last year for Nine rival Ten Network Holdings, before he was outbid by CBS Corp.
John Hartigan, a former CEO of News Corp Australia who is now chairman of regional TV network Prime Media Group Ltd , said Nine had achieved what News had failed to pull off.
"It's the same strategic play ... if they've got scale they've got the ability to leverage different audiences to different advertisers," he told Reuters.
Fairfax has been a fixture of Australian life since it was founded by the Fairfax family in the 1840s. Magnates from Canadian-born Conrad Black to Australia’s Kerry Packer and mining billionaire Gina Rinehart have held large stakes.
But it found itself cast in the role of takeover target as the enormous classified ad revenues that made it a print colossus dried up a decade ago.
Last year it drew bids from two private equity firms, TPG Capital Management and Hellman & Friedman. Neither offer progressed after Fairfax opened its books.
Nine's buyout is subject to shareholder and regulatory approval. The journalists' union asked the competition regulator to reject it because it reduces diversity in one of the most concentrated media markets in the world.
$1 = 1.3428 Australian dollars Writing by Byron Kaye Additional reporting by Jonathan Barrett in Sydney and Ambar Warrick in Bengaluru; Editing by Stephen Coates