Seagram buys PolyGram
Company will take Tropicana public to help finance $10.6 billion deal
NEW YORK (CNNfn) - Seagram Co. Ltd.'s conversion from a Canadian juice and liquor firm to a Hollywood powerhouse took a giant step forward Thursday with its $10.6 billion purchase of music recording giant PolyGram N.V.
The move, which had been widely expected, catapults Seagram to the top of the charts for the music industry, adding such popular artists as Elton John, Nine Inch Nails and LL Cool J to Seagram's Universal Music Group.
It also helps answer some of the criticism waged against Seagram Chief Executive Edgar Bronfman Jr. since he sold Seagram's stake in Dow blue chip DuPont Co. to finance his push into the volatile world of Hollywood.
"Universal's acquisition of an international music company will strengthen Bronfman overnight," said Jim Fifield, the former chief executive officer of EMI Music Group.
"I think it's going to be a big shot in the arm for him," said Steve Cesinger, managing director of Greif & Co. "Being the No. 1 music company is certainly something nice to tout," he said.
Seagram to shed Tropicana unit
To help finance the acquisition, Seagram's board authorized the sale of the company's Tropicana Products Inc. orange juice subsidiary through an initial public offering of common stock.
The moves represent a historic shift for the Canadian beverage company -- which for the first time will derive a majority of its operating income from entertainment businesses.
"These announcements herald an important transformation of Seagram," Bronfman said. (262K WAV or 262K AIF)
Under the agreement in principle, Seagram will fold Philips Electronics NV's 75 percent stake in PolyGram into its Universal Studios Inc. entertainment subsidiary, which it purchased in 1995 from Matsushita Electric Industrial Co.
Universal Studios Chairman and Chief Executive Frank Biondi said the PolyGram buyout will help accelerate the entertainment company's long-term strategy of becoming a dominate player in its market. (180K WAV or 180K AIF)
Seagram plans to conduct a tender offer for the remaining publicly-held shares at about $59 each. Seagram will give shareholders the option of either cash or a combination of cash and common stock.
To help finance the acquisition, Seagram will issue a maximum of about 47.9 million common shares (12 percent of the outstanding shares after the transaction) valued at approximately $2 billion.
As a result of the transaction, Seagram's entertainment assets now constitute nearly 75 percent of overall earnings before interest, taxes, depreciation and amortization.
Meanwhile, Seagram will file a registration statement shortly with the Securities and Exchange Commission for an initial public offering of its Tropicana subsidiary.
Proceeds from the sale would be used to partially fund the 80 percent cash, 20 percent equity acquisition of PolyGram.
Tropicana could fetch up to $4 billion
Seagram estimates the sale of Tropicana will bring it some $3.5 billion to $4 billion, making the sale one of the largest U.S. initial public offerings. Seagram bought Tropicana in 1988 for $1.2 billion.
The balance of the funding for the PolyGram acquisition will come from borrowings and the potential sale of such assets as PolyGram's film library, which includes "The Graduate."
"Philips, PolyGram and Seagram will explore the possibility of a sale of PolyGram's film properties," Bronfman said.
"We believe these properties represent significant value and we may be able to further enhance their value to our shareholders by selling these assets," he added.
While music sales have cooled in the last few years, Bronfman said he expects sales to perk up in the future as the number of retail locations, including the Internet, increases, allowing people to buy their favorite records more easily.
Bronfman no stranger to Hollywood
A third generation member of a Canadian family that made a fortune in the liquor business, Edgar Jr. joined the family business in 1982. Prior to that, he stayed away from the business, founded by grandfather Sam in 1928, to try his hand at screen writing and song writing.
Seven years after he joined Seagram, Bronfman Jr. rose to president of the company and was viewed as the heir apparent. By 1994 Seagram's diversification into entertainment had already begun with the purchase of a 15 percent stake in Time Warner Inc.
In 1995, Bronfman persuaded his father, Edgar Bronfman Sr., and his uncle, Charles Bronfman, to sell Seagram's 25 percent stake in DuPont Co. for $8.8 billion to finance Seagram's acquisition of an 80 percent stake in Universal (then called MCA Inc.) from Matsushita.
Since that $5.7 billion deal, Bronfman has been under the gun to turn Universal into the earnings generator he promised.
But while Universal generated $6.5 billion in revenues, it only yielded $242 million in operating income in fiscal 1997.
Furthermore, DuPont shares have more than doubled in value, while Seagram American Depositary Shares (ADS) have gained about 38 percent, leaving many investors angry over the deal.
Many in Hollywood also criticized Bronfman for buying MCA without a clear strategy.
So in another bold move, Bronfman last October sold Universal television assets to Barry Diller's HSN Inc. network for $4 billion. That also received mixed reviews.
Some observers criticized Bronfman for dismantling the television operation, while others praised his ability to recruit a veteran like Diller.
While Universal's movie operations have lagged with such under performers as this year's "Primary Colors," the music division has by far been the most successful of the old MCA businesses under Seagram.
Many credit Bronfman with hiring industry veterans who have built the music company's image and bottom line in the U.S. market. Seagram's Universal Music unit, which includes MCA Records, Geffen Records and Universal Records, is home to country and western artists George Strait and Reba McEntire.
Before PolyGram, Bronfman was intent on acquiring EMI Group Plc., the music group that is home to The Beatles and The Rolling Stones, but those talks dissolved as he set his sights on PolyGram.
Two other investment groups were reportedly eyeing PolyGram, one led by former Walt Disney Co. President Michael Ovitz.
The New York Times also reported that a second investment group, comprised of Donaldson, Lufkin & Jenrette, Texas Pacific and Jerrold Perenchio, the head of Univision Communications Inc., was considering throwing its hat in the ring.
But Phillips President and Chief Executive Cornelis Boonstra said the decision to sell to Seagram was easy. (264K WAV or 264K AIF)
Seagram (VO) shares closed Thursday up 3-3/4 at 44-3/4 on the New York Stock Exchange.
-- from staff and wire reports
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