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It's Only Money

IT’S BEEN A WONDERFUL WEEK for those of us who put our faith in such things as film libraries, music catalogs and all those nifty assets Wall Street likes to call content.

The confirmation by Seagram that the much-rumored merger talks between it and French media powerhouse Vivendi were indeed on was a tonic for those of us who devoutly believe in content — and a cold bath for the legion of doubters re such assets.

The rumored price for each Seagram share of $70-$75 in some combination of Vivendi and Canal Plus stock quickly became gospel, even if still unofficial.

That’s about 40%-50% above where the Street had valued the Seagram stock before the news, a generous premium for a company where the likelihood of a marriage and even the name of the bridegroom had been widely bruited.

If the nuptials actually take place, what assets will the bride bring to the marriage to justify the $30 billion-plus pricetag the deal puts on Seagram?

Make no mistake — Seagram is today a music company first, the biggest in the world.

Probably its second most important asset is a 45% stake, currently worth about $7 billion, in Barry Diller’s USA Networks.

Universal Studios likely ranks third in the scheme of things, although its ownership by Vivendi and Canal Plus would fulfill a long-standing Gallic dream. Last, it owns a wine and spirits business valued at between $6 billion-$7 billion.

A sampling of analysts’ comments following news of the merger talks revealed the same myopia about the entertainment industry that has characterized their thinking since I earned a modest living as an entertainment industry analyst more than 30 years ago.

WALL STREET CONTINUES to inveigh against “risks” in the movie business, its “volatility” and — the newest one — the threat to the very existence of the music biz posed by freebies on the Internet.

The endless near-term pressures to create something called “shareholder value” has made it almost impossible for management to patiently build asset values such as artist rosters or film libraries.

The New York Times, echoing the shallow thinking prevalent in lower Manhattan, rushed to point out that Seagram’s stock had, since its purchase of 80% of MCA for $5.7 billion in l995, underperformed the S&P 500, and that the Seagram shareholder would have been better off if the company had held onto its huge block of DuPont stock.

This is not just shallow, it is just plain wrong. That mixed bag of assets wouldn’t be worth $30 billion today, and its shareholders most definitely wouldn’t be getting the chance to exchange their Seagram stock for an attractive equity such as Vivendi/Canal Plus.

Clearly some very smart Euros don’t share Wall Street’s worries and are about to put up billions of euros to prove it.

Those on Wall Street and elsewhere who thought Edgar Jr.’s strategic moves misguided at best are reduced to wondering why a very astute French company would pay more than $30 billion for the whole shebang. This happy outcome for the Seagram shareholder is to me further proof that buying solid entertainment assets produces excellent returns over time, even in the face of mediocre execution — a charge that clearly applies to Universal Pictures under Bronfman.

Not long ago, four of the top six worldwide music companies, including No. 1 and No. 2, were American-owned; when the dust of recent merger deals in music settles, exactly half a company — out of the now Big Four tuneries — will be livin’ in the USA.

THE EXPLOSIVE SUCCESS of the DVD has shown a path to the music industry to protect its copyrights by giving the consumer an extremely desirable package at a fairly modest cost. At the same time, it has given new life to films amortized long ago.

It is this ability to have others make huge investments in new technology, creating new and highly profitable markets for entire back catalogs at extremely modest incremental cost, that gives content owners the solidity and even predictability that Wall Street has so long complained they lacked.

Wall Street claims to love recurring profits from established assets. How many more high-premium takeovers of media companies will be required before the analysts recognize the values lying just beneath the surface of all of the major — and most of the not so major — entertainment companies?

(Roger Smith, a former Warner Bros. exec, now heads the Gotham consulting firm Roger Smith & Co.)

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