Pact would make Universal Music Group top industry player

Seagram is in advanced talks with Philips Electronics to acquire its Polygram music arm.

Execs at Polygram and Seagram had no comment Friday, but sources said a deal could be closed within weeks. Execs from the two sides have been meeting daily for more than a week.

The talks come as rival record conglom EMI said on Friday it had ended discussions with an unnamed suitor, presumed to be Seagram, after failing to receive a bid.

Levy weighing counteroffer

To complicate matters further, Polygram prexy and CEO Alain Levy told colleagues late last week that he is exploring the possibility of organizing a buyout of the company he heads. Levy has put in considerable effort and spent more than $1.5 billion during the past seven years to build Polygram’s music and film operations.

Industry veterans cannot recall a time when two of the top companies in any sector of showbiz were in play simultaneously. Together, Polygram and EMI represent almost a third of the worldwide music market.

EMI too high priced

Seagram’s interest in EMI apparently cooled because CEO Edgar Bronfman Jr. was said to have felt that the $9 billion pricetag for EMI was too high; the company has a market capitalization of $7.6 billion dollars.

Based on Friday’s NYSE closing price, Polygram has a market value of $9 billion, but could be worth more than its market value, according to industry observers.

Polygram is a more profitable company than EMI: Execs at the former have spent the past two years restructuring its operation and cutting overhead.

Universal would be No. 1

A deal for Polygram would immediately transform the Seagram-owned Universal Music Group into the No. 1 record company in the world. (Under chairman and CEO Doug Morris, vice chairman Mel Lewinter and prexy Zach Horowitz, Universal has made considerable strides in its domestic music operation during the past two and a half years.)

A Seagram purchase of Polygram’s labels, such as Mercury, Island and A&M, which are home to such artists as Hanson, U2 and Andrea Bocelli, would also likely put the worldwide reins of the music operation under Morris and Lewinter.

Funding its own purchase

Sources also said Friday that Philips execs have expressed a willingness to “take back paper” on a Polygram sale, in essence helping Seagram fund the acquisition, something that could make the purchase more palatable to the stockholders of both firms.

For its part, EMI said its announcement Friday — which came after the London stock exchange closed — was meant “to put an end to the uncertainty and consequent speculation about the fate of the company which the board regards as damaging to the interests of both shareholders and employees.”

Carton eyes EMI

At the same time it was making the announcement, EMI execs privately said word around the company was that Carlton Communications, the London-based media conglom, had expressed an interest in EMI.

If Seagram does buy Polygram, the fate of Levy would be unclear. Execs note that he was informed of Philips’ interest in selling the company only hours before it became public knowledge.

“Alain Levy has tried to build the company slowly, and he has been reluctant to make aggressive acquisitions,” said Arthur Rockwell, a financial analyst with Drake Capital Securities, adding that Philips’ move was in response to Wall Street pressure for major firms to cut costs and concentrate on their core businesses.

While Polygram’s music operation would feel little impact during the negotiations — EMI has been in play for two years and dealmakers still brought acts to the conglom — industry observers suggest that unless a deal is quickly consummated, Polygram will find it increasingly difficult to maintain its momentum in the film business. As a result the company will have a tough time finding “A” film product to distribute.

Working Title hasn’t renewed

Sources said that Tim Bevan and Eric Fellner, who head Polygram’s most successful film label, London-based Working Title, have still not renewed their contracts with Polygram — which have been up for renegotiation for some months — and will not until the company’s future becomes clearer.

After their recent run of success, Bevan and Fellner could probably write their own deal with any studio in Hollywood, but they are understood to be adopting a wait-and-see policy. They remain supporters of Polygram’s ambition to build a European-based film major, and are understood to be worried about the prospect of that vision getting lost.

During the past 12 months, Philips has been engaged in a strategic review of all its businesses, originally set to be completed in February but now extended to the end of 1998.

Philips to focus on core

Philips chairman Cor Boonstra has said he wants to focus on core operations and weed out what he vividly called “bleeders.”

For several years Philips tolerated the absence of synergy with Polygram because of the music company’s decade of double-digit earnings growth, at a time when Philips’ core electronics business was hemorrhaging.

But Polygram’s performance has slowed in the past couple of years as the music market has matured.

Unlike some of it competitors with music, film and TV holdings, Philips has not had any financial nightmares with Polygram. For most of the past decade, it was the only bright spot in the Dutch electronics giant’s disappointing performance.

The eventual success of the film side was designed to lessen Polygram’s heavy reliance on music revenues during soft global market conditions. Film business revenues were 16% of Polygram’s overall take in 1997.

(Benedict Carver contributed to this report.)

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