Company Town : HOLLYWOOD GIANT FOR SALE? : Seagram Speculation Bubbles : Deals: Company refuses to comment on rumors that it may sell 25% stake in DuPont in order to acquire MCA. Market mulls scenarios anyway.

Seagram Co. and DuPont refused to comment Monday on reports that they are negotiating a possible sale of Seagram’s 25% DuPont holding back to the chemical company in order to finance a new venture in the entertainment industry.

But that did not dampen speculation about the radical changes such a transaction would work on both companies.

“If this were to happen, it would clearly be a complete change in the character of Seagram,” said Rich Morrow, a Toronto-based securities analyst at BBN James Capel.

Questions about when and how Seagram might dispose of its huge DuPont stake have circulated around Wall Street since 1981, when Seagram first acquired the stock. They were raised most recently in 1993, when Seagram announced plans to buy heavily into Time Warner. Sale of the DuPont stake was an obvious way to raise the cash needed for a large investment.

That speculation ebbed when Time Warner enacted a “poison pill” aimed at limiting Seagram’s stake to 14.9%, where it stands today. But the talk has resurfaced with reports that Seagram is now negotiating to acquire MCA Corp. from Matsushita Corp. The Japan-based parent is said to be asking $10 billion for MCA.

A sale of the DuPont block could put about $8 billion in cash, after taxes, in the hands of Montreal-based Seagram’s controlling shareholders, the Bronfman family.

Market speculation is rampant that Seagram’s chief executive, Edgar Bronfman Jr., a one-time songwriter and former independent Hollywood producer, is hankering for a more active role in the entertainment industry.

However, there are signs that an outright sale of Seagram’s 164 million DuPont shares might not be a simple matter for either company.

For one thing, divesting the DuPont stake would make Seagram a radically different company--one that its current shareholders might not necessarily relish owning.

“Seagram is no longer a beverage company,” said Scott Black, president of Boston-based Delphi management, a large institutional holder of Seagram stock. “It’s a closed-end fund consisting of DuPont and a couple of ancillary companies.”

Black estimated that DuPont dividends, which contributed $318 million to Seagram’s overall $379 million in profits last year, account for about $28 of Seagram’s stock price. Seagram closed Monday at $30.375 in New York Stock Exchange trading, down $1.375.

That drop, said Martin Romm, a securities analyst at CS First Boston, “reflects a fear they’re going to do something foolish.”

At the very least, selling DuPont and buying MCA would mean giving up a steady, predictable income stream that dominates Seagram’s earnings in favor of a huge investment in a business that produces uneven profits at best and requires management skills the Bronfmans have not yet demonstrated.

“I’d be very unhappy if they unloaded the DuPont,” Black said, “if their intention is to take the excess cash flow and blow it on an entertainment company.”

Similar concerns swirl around the company’s purchase of a stake in Time Warner, which Seagram began amassing, reportedly at the initiative of Edgar Bronfman Jr., in early 1993. The stake cost about $2 billion and is worth about that much today.

Moreover, sale of the DuPont shares at today’s market prices would mean a $7-billion capital gain for Seagram, which would cost about $2 billion in capital gains taxes. Although sources say the two companies are striving to find a non-taxable way to accomplish the transfer, that might be difficult.

*

“I haven’t seen any way to make this tax-free,” said Paul Raman, a chemical industry analyst for S.G. Warburg & Co. in New York. One possibility, calling for Seagram to effectively swap the DuPont stock to Matsushita for MCA, would require Matsushita to hold a $10-billion position in DuPont indefinitely.

“It’s very unlikely Matsushita would be comfortable with a $10-billion holding in DuPont,” Raman said.

From DuPont’s standpoint, repurchase of the Seagram shares also has its complexities. One issue is how to finance the deal without overburdening the company with debt or jeopardizing the $1.8 billion in capital investments it is planning this year.

“I don’t think they could spend $1.8 billion in capital improvements and buy back the stock,” said Fred H. Siemer, a chemical industry analyst.

However, others said that DuPont could raise the money through a combination of borrowings and asset sales. DuPont has already filed registration statements with the Securities and Exchange Commission for $3 billion in as yet unissued debt, Raman said. The company has access to another $1.6 billion in bank credit and cash on hand of about $1.1 billion.

Raman estimates that DuPont could raise another $5 billion from the sale of businesses and assets, including 20% of its Conoco subsidiary, an oil company, which could bring in about $3.5 billion.

Such a deal might delight the remaining shareholders, he argued, because the retirement of Seagram’s 164-million shares would make theirs more valuable. The deal could drive up the price of DuPont stock by another $4-5 a share over the next few months, he said.

*

From the standpoint of DuPont management, the deal might have another benefit: removing the Bronfmans from the board. The family currently occupies four of the board’s 16 seats through the membership of Edgar Bronfman Jr.; his father, Edgar Sr.; an uncle, Charles Bronfman, and John L. Weinberg, an investment banker who also sits on the Seagram board.

Although industry observers say the Bronfmans have helped DuPont by pressing its management to undertake long-overdue streamlining measures, they have also clashed with management--most recently over Conoco’s ill-fated plan to help develop Persian Gulf oil fields in conjunction with the Iranian government.

Reports say that when the deal was announced to the board last month it ran into objections from the Bronfmans. They extracted an agreement from management that the deal would go through only if it won the approval of the White House.

Edgar Bronfman Sr. then lobbied vigorously against the deal in Washington; in the end, President Clinton blocked the arrangement by executive order and Conoco was forced to terminate the contract.

*

Inside Hollywood

* For more Company Town coverage and insightful analysis of the entertainment industry, sign on to the TimesLink on-line service and “jump” to keyword “Inside Hollywood.”

Details on Times electronic services, B4