Polygram up for grabs

Philips looks to spin off diskery giant; no buyer yet

LONDON — Dutch electronics giant Philips signaled Wednesday that it is looking to sell its 75% stake in Polygram, the world’s No. 1 music company and an increasingly important player in the film and television business.

A brief Philips statement indicated that it has received approaches from possible bidders. “In response to inquiries prompted by recent press speculation … Philips announces that it is evaluating various strategic options with respect to its stake in Polygram,” the company said.

The right price

“It’s a clear offer to sell for the right price,” commented financial analyst Ad Van De Laar of Dutch bank Labouchere. “If Philips didn’t want to sell, they wouldn’t issue this kind of statement.”

Speculation about potential buyers immediately centered upon Seagram, News Corp. and Walt Disney Co.

Seagram appears the most likely of the three to be interested in Polygram. It has been eyeing London-based music giant EMI, which reported last week that it had received a takeover offer from an undisclosed bidder. The pricetag for EMI is between $9 billion and $11 billion.

Analysts suggest that a full bid for Polygram would cost the buyer around $12 billion, a premium of around 50% on the current stock price. The 25% stake not owned by Philips is publicly held via the Amsterdam Stock Exchange, but under takeover rules any bid for the Philips stake would have to be extended to the remaining shareholders.

Both Seagram and Disney declined comment. A News Corp. spokeswoman said: “We are not in any discussions with Philips about Polygram.”

EMI activity

Last week’s flurry of activity surrounding EMI seems to have triggered Philips to declare its interest in offloading Polygram. Polygram shares surged last week on the Amsterdam Stock Exchange after EMI confirmed it had been approached for a possible takeover, and the market started to speculate on a bid for Polygram as well.

A Polygram spokesperson said Wednesday, “We embrace any strategic options which will maximize long-term value for our shareholders, as well as broaden opportunities for our management team, employees and talent.”

Arthur Rockwell, an analyst with Los Angeles-based Drake Capital Securities, said that Philips’ move was in response to Wall Street pressure for major firms to cut costs, consolidate and concentrate on their core businesses.

“(Polygram prexy/CEO) Alain Levy has tried to build the company slowly and he has been reluctant to make aggressive acquisitions,” said Rockwell. “Institutional investors are impatient with that.”

Principal attraction

The principal attraction for any potential bidders is clearly Polygram’s music business, which still makes up 84% of the company’s earnings, despite the growth of Polygram Filmed Entertainment. Polygram has an estimated 17% market share in the global music business, making it the No. 1 player.

Whether the burgeoning film division will be a positive attraction to buyers, or merely incidental, is open to question, according to analysts.

With most speculation about potential buyers centering on companies that already own major Hollywood studios, the general assumption is that any buyer would dismantle PFE as a stand-alone entity, and absorb the most valuable pieces into their existing operations.

Sources said that senior execs at Universal Studios, which is owned by Seagram, believed that U would make a good fit with Polygram.

Universal Music Group, the smallest of the big six global record companies, is focused on the U.S. market. Polygram, conversely, is strongest overseas.

But finding a buyer may not be that easy. “EMI has been in play for the past year-and-a-half and hasn’t been able to find a buyer willing to pay an acceptable price,” noted Stewart Halpern, principal and senior entertainment anlalyst at Furman Selz. “That suggests it’s no slam dunk for Polygram, which will be going to the same universe of buyers.”

In search of a team

On the film side, Polygram’s stand-alone international distribution network would give U a way out of UIP, while the studio is still in search of a new team to head its domestic operation.

Insiders report that Polygram’s most senior managers have recently been moving quickly to sign new employment contracts, to protect themselves in the event of a takeover, as speculation started to grow within the company.

Polygram-owned film and music labels were also on the alert. “We are reviewing the latest developments with great interest,” said Russell Simmons, chief executive officer of rap label Def Jam.

For the past 12 months, Philips has been engaged in a strategic review of all its businesses. This was originally due to be completed in February, but is now due to continue to the end of 1998.

But analysts say this review has already concluded that there is “not much in the way of synergy” between Philips and Polygram, and that cashing in its Polygram stake would give Philips a formidable war chest to reinvest in its electronics business.

For several years Philips has 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 money.

Performance slowed

But Polygram’s performance has slowed in the past couple of years as the music market has matured — precisely the reason why the company decided to diversify into film, in order to find a way of sustaining its growth. Polygram labels include Island, A&M and Mercury.

Philips does not necessarily intend to sell Polygram outright. It may seek to spin off the company as an autonomous unit or sell a majority stake. Another option would be a management buy-out, but analysts said that a total sale would be the company’s preferred option.

Polygram’s first quarter figures this year showed an 82% drop in profits on static sales, and the second quarter results are not expected to be much better, with all the company’s big music and film releases scheduled for the second half of the year.

(Marlene Edmunds in Amsterdam and Andrew Hindes in Los Angeles contributed to this story.)