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Street toasts deal

Seagram stock climbs; analyst reactions mixed

Stock in Seagram Co. rose 44¢ to $45.18 Friday, highlighting Wall Street’s largely positive reaction to the conglomerate’s $10.6 billion acquisition of Polygram.

Although there was praise for the deal, Wall Streeters also expressed wariness about the strategic implications of the acquisition and the sale of Tropicana, which Seagram said would help finance the purchase. Moody’s Investor Services said Friday it would review for possible downgrade Seagram’s credit rating as a result of the transaction.

Moody’s said its review would focus on “the business risk profile that Seagram will have as its earnings mix shifts toward the more volatile media and entertainment sector and away from the more stable spirits sector,” as well as Seagram’s higher debt load.

Seagram CEO Edgar Bronfman Jr. said the deal was a “significant realignment” of the company, making it a global entertainment leader. After the acquisition, which won’t likely close until the fall, Seagram will derive 70% of its revenue from entertainment.

He said Seagram would end up with debt of between $8.5 billion and $9 billion, compared with net debt of $2.6 billion currently. Bronfman also said, however, that Seagram would eventually sell its remaining Time Warner stake, which is now worth close to $1 billion.

Short-playing song?

Seagram’s stock market rally isn’t likely to last too long, judging by Wall Street analysts’ reaction. Salomon Smith Barney analyst Jill Krutick kept her neutral rating on Seagram both because Seagram’s stock price already reflects the “potential benefits” of the deal and because Seagram has swapped “a stable double-digit cash flow growth business for one that has more volatile cash flow characteristics (music).”

Krutick said Seagram was fairly valued at $45 a share. Merrill Lynch analyst Jessica Reif Cohen said Seagram was worth $50 a share.

Schroders analyst David Londoner was very positive about the acquisition, noting that the music business generates a lot of cash. “Long range, the music business grows very nicely, beats GDP (growth),” he said.

Similarly, Cowen & Co. analyst Harold Vogel said a company “of this quality and size doesn’t come up for sale very often.” He predicted that the music industry would turn in the next couple of years.

“I think he is quite right in takingthe long view,” Vogel said of Bronfman.

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