Street slips a disc

Vague sale prospects drop Polygram stock

NEW YORK — Uncertainty on Wall Street about the prospects for sale of Polygram Holdings sent Polygram’s stock price down slightly Tuesday and is keeping it well below the expected deal price, Wall Streeters said.

While Seagram Co. Ltd. is thought to be close to an agreement with Philips Electronics NV for the purchase of Polygram at a price of $10 billion to $11 billion, analysts said investors are wary of pushing up the price until a deal gets announced.

The $10 billion-to-$11 billion pricetag translates to a $60-a-share price for Polygram, roughly in line with most analyst valuations of the company. But Polygram stock closed down 37¢ to $51.75 Tuesday.

Lows and highs

Polygram stock has come up from a low of $43 before Philips declared last week it was reviewing its options for divestment of its 75%-owned subsidiary. But Polygram stock has also traded as high as $63 in the past year and analysts say a sale would likely have to be priced close to that level.

Wall Streeters say the doubts about the deal coming together explain the market’s reaction.

“You don’t know if there is going to be a deal or if it’s going to be stock. There is lots of uncertainties here,” Merrill Lynch analyst Jessica Reif Cohen said.

Philips’ declaration that it was reviewing its options is widely viewed on Wall Street as a sign that the Dutch electronics conglomerate has only one keen buyer for Polygram — Seagram. If Philips and Seagram can’t negotiate a deal, Wall Streeters said Philips’ options include buying the outstanding 25% of Polygram, bringing in a financial partner or taking a big cash dividend out of Polygram.

Question of structure

Investment bankers say even if Seagram and Philips agree on price, Seagram will have to spend some time figuring out the best structure to use. Sources say Seagram could use the acquisition of Polygram as a way to separate its beverage business from its entertainment business, a long-sought goal for many investors in Seagram.

Sources say Seagram could merge Universal Studios Inc. into Polygram and keep Polygram publicly traded. That would mean the public shareholders who now own 25% of Polygram’s outstanding stock could end up not getting bought out.

Wall Streeters say Polygram’s stock trading also reflects investors’ unhappy experience with the on-again, off-again Seagram-EMI Music Group’s takeover negotiations. Reports of Seagram’s renewed interest in EMI last month sent EMI’s stock price jumping, causing big losses for investors when EMI announced last week that the talks were off.

“People have been burned once,” one observer said. One takeover speculator said Tuesday he would wait until a deal was announced before buying into Polygram.

Rumors flying

Meanwhile rumors continue to circulate that Polygram CEO Alain Levy is trying to mount a management buyout, with French bank Societe Generale said to be backing him in the bid. But Wall Streeters downplay the likelihood of Levy proceeding, as he would likely need to raise $5 billion to $6 billion in equity to finance such a deal. Polygram declined comment.

Polygram last year had operating income of about $640 million from its music operations and an operating loss of about $53 million from its film side (although the film group made money in the fourth quarter). Bankers said this level of earnings could support debt of only about $4 billion.

But the deal is very doable for Seagram, which can cut costs by combining Polygram and Universal, analysts said. Schroders’ David Londoner estimates Seagram could find about $150 million in cost savings by merging the two companies.

Londoner said Polygram’s music side is worth about $10 billion, based on its earnings, while the strength of Polygram Filmed Entertainment’s catalog makes that business worth about $1 billion.

Additionally, he said, “There are probably some hidden assets in there that we are not focusing on,” which might raise the value of Polygram even further.

Seagram shares closed down 56¢ Tuesday to $42.56.

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