I dont know if there is a simpler solution but you could just transfer all units, buildings and heros to one faction. (add buildings, units and heroes to be buildable with the other faction). then you only have to merge the spellbook (i suggest pic what spells you want and make a new one).
the hard thing to do will be the modifications to the war of the ring thingy so that your new faction works properly (with all new stuff buildable on the world map)
i remember i struggled to enable one new hero to be build on the world map so adding all this new stuff should be quite challenging.