Seagram Uncorks $10.6-Billion Deal to Buy PolyGram

Marking the biggest deal in the history of the record business, Seagram Co. agreed Thursday to pay $10.6 billion to acquire global music giant PolyGram N.V., home to such popular and diverse acts as Hanson, LL Cool J, Van Morrison and Luciano Pavarotti.

The acquisition would instantly turn the Canadian liquor maker into the world’s largest music conglomerate and radically alter the architecture of the business itself by shrinking the number of global competitors from six to five: Seagram, Sony, Bertlesmann, Time Warner and EMI.

The timing of the transaction is significant in part, because it comes as the music business is on the crest of being turned upside down by changes spurred by the Internet and digital technologies. They promise dramatic changes in the way records are made and delivered to listeners, with the prospect of eventually bypassing the traditional record retailer altogether.

It also makes Seagram’s 43-year-old president, Edgar Bronfman Jr., the most powerful figure in the $40-billion global music business and transforms his family spirits business into a largely entertainment company that rivals other media giants such as Time Warner Inc. and Walt Disney Co.

Bronfman, a sometime lyricist who co-wrote pop star Celine Dion’s current single “To Love You More,” clearly views the acquisition of PolyGram as the most critical piece of Seagram’s entertainment strategy. By adding PolyGram, Bronfman is catapulting Seagram from the bottom to the top of the U.S. music market, selling one out of every five albums.

Bronfman’s willingness to pay nearly double the $5.7 billion he spent three years ago for 80% of Universal Studios Inc.’s film, TV, music, publishing and theme park operations underscores the importance of the sometimes underrated music business as a valuable asset in an increasingly global market.

Like the movie industry, music is a business driven by hits. The difference is that it requires much less money up front, and pumps out cash quickly. Profits on hit artists can be huge, and the cash companies generate is more predictable than in film. PolyGram’s music operation generated some $750 million in cash in 1997, while Universal’s profit was about $90 million.

Bronfman is banking on the music business at a time when international sales are at their lowest ebb. Over the past decade, the industry has gone through a major transformation and companies can no longer rely on a Michael Jackson, Madonna or Hanson to drive their international businesses. Now, companies are betting on local talent overseas to become superstars in their respective markets to add to the profits generated by their U.S. counterparts.

For the past 10 years, PolyGram has dominated the global market by developing superstars in Latin America, Japan and Europe. In recent years, the company has had luck exporting indigenous talent to the U.S. and has had hits with such acts as Italian tenor Andrea Bocelli, who last year sold nearly 7 million albums around the world.

To help fund the cost of his acquisition, Bronfman announced plans to sell off Seagram’s Tropicana Products to the public in what is expected to be one of the biggest such stock offerings ever. Seagram estimates the value of the subsidiary--which makes Tropicana orange juice and other juice products--at $3.5 billion to $4 billion.

Capping two months of intense negotiations between Seagram and PolyGram’s Dutch parent Royal Philips Electronics N.V., which owns 75% of the global music and entertainment company, Seagram’s tentative deal would pay Philips and PolyGram’s other shareholders approximately 80% in cash and 20% in stock. Philips and PolyGram shareholders will invest as much as $2 billion in Seagram, giving the Dutch consumer electronics company a potential stake of as much as 12% in Seagram.

Seagram said it also will pay for PolyGram by borrowing funds and potentially selling PolyGram assets, including a film unit responsible for such popular movies as “Bean,” “Four Weddings and a Funeral” and “Fargo.” Bronfman also believes he can slash music overhead costs by $275 million to $300 million annually when he merges the two record companies.

In addition to its music assets, PolyGram has a library of 1,500 movies and 11,000 hours of TV programs, and a collection of boutique movie companies. Despite hits like “Four Weddings,” the film company consistently loses money, posting a $55-million deficit last year. While Seagram is said to value PolyGram’s film assets at around $1 billion, Wall Street analysts counter that a more realistic valuation would be $500 million to $750 million. There could be any number of potential buyers for the film assets, including Canal Plus, Europe’s largest pay TV operator, which publicly acknowledged this week that it is interested.

Analysts agree with Bronfman that PolyGram and Universal are a strategic fit, although some entertainment executives and analysts believe the price Bronfman is paying is steep.

A leader in classical music with additional strengths in rock and jazz, PolyGram has annual music revenue of $4.7 billion. Universal’s music revenue is $1.5 billion, giving the combined entity revenue of $6.2 billion. The addition of PolyGram will give Seagram annual revenue of $17.4 billion after the sale of Tropicana, with about two-thirds coming from entertainment.

The PolyGram acquisition is being heralded on Wall Street and by entertainment executives as a savvy and shrewd business move by Bronfman, who has otherwise been criticized in the investment community for seeming to lack a clear strategy and overall vision for Universal.

“This is the emergence of Seagram as a bona fide entertainment company that can now trade at the same kind of multiples as Time Warner or Disney, which can be highly advantageous to Seagram shareholders,” said Chris Dixon, an analyst at PaineWebber. “This gives Edgar a for-real seat at the big boys’ table.”

Warner Brothers co-chairman Bob Daly, who helps oversee Time Warner’s music and film divisions, said: “From a corporate standpoint, I think it’s better for the industry to have five companies instead of six bidding on an act. That’s one less company around to drive up the cost of talent. I think this merger is a real positive development in the global business.”

The issue of management is yet to be worked out as to who would oversee the combined entity. At a press conference in New York on Thursday, Bronfman skirted a question about the future status of PolyGram chief Alain Levy, saying that the managements of Universal and PolyGram “are now going to sit down and work together to figure out how we’re going to meld the two companies. But we haven’t had those kinds of discussions yet.”

Sources indicate Seagram is considering offering Levy a position at the combined firm, but it is unclear whether he would even accept a role particularly if it meant sharing duties with another executive.

Music veteran Doug Morris, who was handpicked by Bronfman to run Universal Music Group three years ago, is expected to play a key management role. Under Morris’ watch, Universal has become a domestic rock powerhouse with the addition of Jimmy Iovine and Ted Field’s controversial label Interscope Records, whose artist roster includes the Wallflowers and Dr. Dre. Other artists in the Universal family include Garbage, Erykah Badu and country artists George Strait, George Jones and Reba McEntire.

The sale should also benefit PolyGram by transferring ownership from a company whose core business is consumer electronics to one that considers music key to its future growth.

Philips chief executive Cornelis Boonstra, who will join Seagram’s board, first approached Bronfman about buying PolyGram two months ago just at a time when the Seagram chairman was revisiting the idea of buying music rival EMI. Bronfman had been in on-again, off-again talks with EMI for more than two years but was unwilling to pay the steep price being asked.

Bronfman plans to expand on a global strategy, and with PolyGram will have the distribution muscle to pull that off. PolyGram has the premier distribution system in the U.S. and abroad, a major plus for Universal Music Group, which has virtually no presence abroad. Consequently, Universal will essentially be subsumed by PolyGram rather than the reverse.

Bronfman is not daunted by the current global music slump and said he thinks the business is superbly positioned for growth: “In the near term, the outlook is showing signs of strength at retail, though it’s not yet translated to the bottom line.” In the longer run, he added, “half the world’s population is under 25 years old, and they make up the bulk of music buyers.”

Bronfman also believes technology will help the industry to reach older people “who really don’t venture into record stores much anymore.” Today there are “a couple of hundred thousand” music stores worldwide, Bronfman said. But in five to 10 years “there may be hundreds of millions of distribution points, because music will be sold directly to the home and digitally downloaded.”

Music mogul David Geffen, Bronfman’s close friend whose DreamWorks record label is distributed by Universal, agreed. “The introduction of a new delivery system portends well for the music business and will make the cost of [manufacturing and distributing] records go down.”

By combining Universal and PolyGram’s manufacturing, distribution and administrative functions, Seagram will see considerable savings. It is unclear how many jobs will be lost at PolyGram, which employs 12,000 people around the world, or at Universal Music Group, which has about 3,500 employees. Sources believe that most of the staff cuts will come at PolyGram’s U.S. operation, which has headquarters in New York, and Universal’s international division.

Seagram is acquiring Philips’ 75% share in PolyGram for approximately $59 a share. The transaction dilutes the Bronfman family stake in Seagram to approximately 29% from about 35%.

Seagram shares surged $3.75, to a record $44.75 on the NYSE, while PolyGram rose $1.75, to $56.88.

Bronfman said he plans to help pay for the acquisition by selling his 11.8 million shares of Time Warner, which at the current stock price of $82.19 comes to just under $970 million. He said he will continue to monitor the market for an opportune time.

He called the business “a pivotal industry that we believe will have exponential growth in the future, and in the meantime, this company will have dramatic growth as a result of this combination.”

Times staff writer Thomas S. Mulligan in New York contributed to this report.

* BRONFMAN’S BET: Seagram is placing nearly all its chips on entertainment. D1

* THE GLOBAL APPEAL: PolyGram’s international success was a big lure. D1