Seagram sings new tune

$10.6B deal alters Seagram

NEW YORK — Seagram unveiled its $10.6 billion cash-and-stock acquisition of music giant Polygram from Philips Electronics Thursday, converting the company from a predominantly beverage business into a primarily entertainment company.

Seagram will merge Polygram’s music group, the biggest in the world, with the music division of Universal Studios. Not only will entertainment become by far the largest part of Seagram’s business, accounting for two-thirds of Seagram’s estimated $17.4 billion in future annual revenue, but music will account for about half of the entertainment business by revenue.

“We were an emerging entertainment company,” Seagram CEO Edgar Bronfman told a hastily convened press conference at Seagram’s headquarters. “We now become an entertainment leader and the world’s largest and most international music company.”

Accentuating the shift away from beverage into showbiz, Seagram said it would sell its Tropicana fruit juice business in an initial public offering estimated to raise between $3.5 billion and $4 billion to help pay for the Polygram acquisition. Seagram retains its spirits and wines business, which will account for about one-third of its revenue in future.

At the same time, Bronfman said Seagram and Polygram “will explore the possibility of a sale” of Polygram Filmed Entertainment, which bankers estimate could fetch about $1 billion. Goldman Sachs has been retained for the sale.

Bronfman said that while PFE was valuable, “a number of the assets in that unit are somewhat duplicative of the assets we have at Universal … We think (PFE) may be more valuable to an outside buyer.”

PFE CEO Michael Kuhn said Thursday he had “fought” for Seagram to sell the unit and hopes to lead a buyout if he can bring in a strategic partner to back the purchase. Kuhn said Thursday Polygram had already been approached by several possible partners, such as Canal Plus, in the past couple of weeks.

Kuhn is not guaranteed the deal, however. Sources close to the situation said Seagram will likely sell the film unit to the highest bidder, which could range from a European company to a U.S. major interested in building its library.

The future of Polygram CEO Alain Levy is much less clear. An unsmiling Levy appeared at the press conference, and even got up on the stage with Bronfman, Universal chairman Frank Biondi and Philips CEO Cornelis Boonstra for a photo session, although Levy left the stage well before the photo session ended.

As the press conference broke up Levy told Variety he was “examining my options” for the future but declined to comment further.

Bronfman told reporters that management of both U and Polygram “are now going to sit down and work together to figure out how we will meld the two companies,” but he declined to comment on the future of any exec.

$59 a share

Seagram will make a tender offer for Polygram of about $59 a share, offering 80% cash and 20% stock with no more than $2 billion in stock to be issued. Polygram shareholders will have the choice of taking cash or cash and stock, but Polygram’s 75% shareholder Philips Electronics has guaranteed to take as much stock as available.

That means Philips could end up with as much as 12% of Seagram’s stock, while the Bronfman family’s stake in Seagram would be diluted from nearly 35% currently to 29%.

Philips’ Boonstra, who will join the Seagram board after the deal, said the shareholding would enable Philips to participate in the growth of the combined Universal-Polygram.

“This transaction allows Philips to focus its resources on achieving world-class status in its core businesses,” Boonstra added. He said Philips recognized “over the last few years that while Polygram was a superb company, it didn’t complement our core business.”

Bronfman estimated Seagram would end up with about $8.5 billion to $9 billion of debt after the deal, compared with its current net debt of $2.6 billion. But the debt will likely come down by at least $1 billion quickly, as Seagram still owns about that much in Time Warner stock and Bronfman said this remaining investment would be sold eventually.

Earnings downturn

The briefing came several hours after Polygram’s board put its stamp of approval on the deal after what sources said was a tumultuous meeting. Directors of Philips and Seagram had approved the deal at separate meetings earlier in the week.

The international music market has experienced tough conditions in the past couple of years, as sales have slowed and discount retailers in the U.S. have slashed prices. Most music companies have suffered earnings downturns as a result, including Polygram.

Bronfman said that “the near term outlook for the music business is showing some signs of strength” and added that longer term, the music industry’s macro growth prospects were “substantial.”

He said there was a “tremendous amount of opportunity for this combination to grow,” not just from sales to young music buyers but also from the use of Internet distribution now emerging as a sales tool of the music industry.

Bronfman estimated integration of Universal and Polygram would produce cost savings of $275 million to $300 million annually. He gave few details of how these savings would be achieved, however, noting that they would take about two years to achieve.

Seagram execs told a conference call with Wall Street analysts that the combined company would take a $700 million charge against earnings to cover the cost of combining operations and closing some facilities, according to analysts on the call. This charge is believed to include costs related to the acquisition.

Seagram execs did not return calls seeking comment late Thursday.

International presence

Biondi said, “Polygram gives us the critically important international presence in music,” noting that two-thirds of U’s music sales are in North America. Polygram, on the other hand, has a market share of close to 50% in Europe and makes about three-quarters of its sales outside North America.

Polygram music execs applauded the deal. In a prepared statement, Def Jam Recordings CEO Russell Simmons said the deal was “wonderful news for Def Jam and all Polygram labels.”

The acquisition fulfills a long-held dream of Bronfman to become a major player in music. He has said frequently in public that he believed music represented the greatest opportunity for growth in entertainment.

In contrast, U has tightly limited its capital investment in film, and one banker close to the negotiations said Bronfman’s intention to sell PFE was a sign he wanted to “de-emphasize” the role of film in U’s business.

Bronfman told the press conference he had approached Philips about a year ago to say Seagram was interested in Polygram if the Dutch company was ever interested in selling. Bronfman, as has been reported, had earlier approached EMI about possible acquisition of that company.

Negotiations on the Polygram deal commenced about two months ago, Bronfman said, coinciding for a time with talks Bronfman restarted with EMI. Those negotiations ended about two weeks ago, and Bronfman declined to comment Thursday “on any other discussions that we might have had with other companies.”

Boonstra also declined comment on other approaches Philips had about Polygram, such as from the leveraged buyout group led by former Creative Artists Agency chairman Michael Ovitz. Boonstra said Philips concluded that “the best buyer was Seagram.”

Ovitz’s presence

People close to the negotiations said Ovitz’s appearance, at a time when the Seagram deal was not concluded, “was helpful” in raising the price in the final deal. At $59 a share, Seagram is paying a price squarely in the range of most analyst valuations of Polygram.

“We had estimates of between $56 and $62 a share,” said Cowen & Co. analyst Harold Vogel, who said the deal was positive for Seagram.

Wall Street applauded the well-publicized deal, pushing Seagram stock up $3.75 to $44.75 while Polygram rose $1.75 to $56.88. Philips lost 31¢ to close at $99.31.

Part of the investor euphoria is undoubtedly related to the big profit Seagram will get if it sells Tropicana at the price it believes the unit is worth. Bronfman noted that Seagram acquired the fruit juice company for $1.2 billion in 1988, so the estimated value would yield a profit of $2.4 billion.

Wall Street analysts hope Seagram eventually splits its entertainment and beverage operations. There are reasons to believe the company will use this deal as the opportunity to do so, but tax reasons related to the 1995 MCA purchase are believed to delay that plan for at least another couple of years.

The Polygram transaction is expected to close between four months and six months from now, subject to regulatory approval not only in the U.S. but from the Commission of the European Community.

Bronfman said while he expected a “rigorous regulatory review, there is no basis on which the government should stop or adjust the transaction.”