Polygram price lowered

$340 mil cut blamed on 2nd-qtr. perf

NEW YORK — A deterioration in Polygram’s second-quarter performance prompted Seagram Co. to negotiate a $340 million reduction in the $10 billion-plus price it is paying for the music and film conglomerate, Seagram said Monday.

Polygram’s 75% shareholder, Philips Electronics, agreed to the lower price over the weekend, clearing the way for the signing Sunday night of the definitive agreement on the sale. Seagram will now pay about $57 a share or $10.26 billion in stock and cash, compared with the original price of $59 a share or $10.6 billion.

With the deal finalized, after a two-week delay while Seagram and Philips haggled over the price, Polygram CEO Alain Levy announced his long-expected departure. Levy will be replaced until the Seagram deal closes later in the year by Polygram CFO Jan Cook.

What prompted the last-minute price revision remained murky Monday. Seagram would only say in a statement the lower price reflects “lower than expected financial results of Polygram during the second quarter” but it referred queries to Polygram, which declined comment.

The statement suggests Polygram’s disastrous first-quarter performance has extended into the second quarter. In the first quarter, net earnings plummeted 88% due to a lack of major album releases and problems in Asian markets.

When the first quarter’s results were released in late April, Polygram warned it did not expect a full recovery until the second half of the year when “the release schedule unfolds.”

At the time, Polygram said second-quarter results in music were expected to be “approximately in line with that of last year” while film was expected to be “soft.” Seagram’s statement Monday suggested the earnings have continued to deteriorate into the second quarter, rather than staying flat.

But some people close to the situation were skeptical, noting that the original deal was negotiated just a month ago, halfway through the quarter, and it is not clear what could have changed so dramatically in the past month to require a price reduction.

No other choice

Seagram likely felt it had the upper hand in the negotiations, however, and Philips apparently felt it had no other choice than to take the lower price.

The price reduction was magnified for U.S. investors holding some of the outstanding 25% of Polygram’s stock because the dollar strengthened against the Dutch guilder in the month since the deal was announced and Seagram is denominating the offer in guilders. Indeed, Seagram valued the final price at $10.4 billion, calculating it based on last month’s exchange rate.

Polygram stock, which had fallen 93¢ on Friday on reports of troubles in the negotiations, closed up 12¢ Monday as traders reacted to the new offer price. Seagram stock fell 69¢ to close at $40.93.

Seagram is making the acquisition through its subsidiary Universal Studios Inc. It is offering a mix of cash and stock, with a maximum of $2 billion in stock to be issued.

The price reduction means that the exchange ratio of Seagram shares for each Polygram share has been changed, from 1.4012 to 1.3772.

The definitive agreement still has to pass regulatory scrutiny and won’t close for another four or five months.