Kerkorian Joins Fray for PolyGram Unit

In another mystifying twist in the affairs of Hollywood, sources said that Las Vegas billionaire Kirk Kerkorian has expressed last-minute interest in buying PolyGram Filmed Entertainment.

The surprise move comes even as Kerkorian is seeking financial relief for his own cash-strapped studio, MGM, possibly through a venture with a big media company that could provide cash and access to a global distribution outlet.

Ironically, two years ago it was Kerkorian who at the eleventh hour came up with a surprise $1.3-billion bid for MGM (with Australia’s Seven Network) that whisked the studio away from its expected buyer--PolyGram.

Sources indicate that Kerkorian surprised investment bankers at Goldman, Sachs & Co., the firm advising Seagram Co. on the PolyGram sale, when he expressed interest within the last few days in buying the movie company.

Many industry analysts believe that despite his efforts to keep MGM afloat--which includes a recent commitment to pour an additional $500 million of his own money into the struggling studio--ultimately Kerkorian will look to sell the legendary studio for the third time.

Kerkorian’s Tracinda Corp. joins a list of suitors for PolyGram’s film unit that includes EMI, Canal Plus, Carlton Communications, Pearsons and Artisan. Over the last two weeks, those potential buyers have heard detailed presentations from PolyGram President Michael Kuhn.

Before Kerkorian gets a presentation and access to the company’s financial data, he must convince bankers that his interest is serious. Like the other bidders, he has to disclose the financial range of an offer and the nature of his intentions, stipulating whether his interest goes beyond PolyGram’s valuable 1,500-title library that includes such offerings as “Four Weddings and a Funeral,” “Bean” and “Fargo” in addition to older catalog classics such as “The Graduate” and “When Harry Met Sally.”

If he establishes serious interest, sources said PolyGram management will probably make a presentation to Kerkorian this week. Both Tracinda and PolyGram refused to comment Monday.

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MGM already has the largest postmodern library in the world with about 4,000 titles, but it is heavily encumbered by a long-term video rights deal with Warner Bros. that doesn’t expire until 2003 and cable deals with Ted Turner (Time Warner’s largest shareholder) that won’t see any reversion of rights until 2000 and beyond.

Kerkorian’s statement of interest in another pure content play is perplexing, unless it’s to make its library more attractive in anticipation of a strategic partnership with another media company, such as Walt Disney Co. or Warner. Certainly the addition of PolyGram’s movie production operations can’t be what Kerkorian is after because MGM can scarcely afford to fund its own scaled back movie slate.

The other reason Kerkorian would conceivably be interested in PolyGram is for its global distribution network in 14 major countries around the world with the exception of Japan.

While MGM, along with Universal Pictures and Paramount Pictures, has a one-third interest in United Pictures International through which it distributes its product overseas, it’s plausible it would want to release its movies and home videos directly.

Almost as bewildering as Kerkorian’s rationale for buying MGM is EMI’s.

Why would Britain’s largest music company want back into the high-risk movie business, particularly at a time when it is struggling in its own core business and has itself considered being sold?

EMI, which has been trying to increase music sales to prop up its earnings and boost its sagging stock, once dabbled in the movie business in the late 1970s and early ‘80s with such films as Oscar-winning “The Deer Hunter,” “Tender Mercies” and “The Elephant Man.”

Over the weekend, the Sunday Times in London characterized EMI as “the favored candidate” in the bidding for PolyGram’s film unit, and EMI confirmed Monday that it is one of a number of bidders.

Sources say there’s no indication that the music giant is any more a front-runner for the movie company than the other early bidders.

Those sources also suggested that someone inside EMI floated the “favored candidate” concept in the London newspaper as a trial balloon to see what kind of impact it would have on EMI’s stock price. On Monday, EMI shares declined 7% in trading in London.

While EMI and others have expressed serious interest in PolyGram, none have made binding offers. Sources said final bids are due Sept. 11.

The burning question is why is EMI so interested.

Just four months ago, EMI was considering selling itself to Seagram. When the talks fell apart, reportedly over price, Seagram made a deal in June to acquire PolyGram, which in addition to the movie company operates the largest music empire in the world.

To help fund its $10.4-billion purchase, Seagram--which already owns a movie studio in Universal Pictures--put PolyGram’s film holdings on the block.

Sources suggest that by buying PolyGram’s film unit, EMI--home to such acts as the Beastie Boys, Master P and the Spice Girls--could diversify its business.

There’s speculation that EMI Chairman Colin Southgate might also try to recruit former PolyGram chief Alain Levy to run the combined film and music divisions, although sources close to EMI said Monday that Levy has only spoken briefly to Southgate twice over the last month and has not been offered any job at EMI.

There is also still speculation among analysts that EMI remains a takeover target and could merge eventually with German entertainment giant Bertelsmann if the sale price dropped to the $5-billion range. Other potential suitors include Viacom, Microsoft and News Corp.

Is EMI’s bid for the PolyGram unit a sign of a new entertainment strategy for the British conglomerate or simply the latest in a series of corporate missteps?

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Over the last 15 months, EMI shares have taken a beating as its board shut down two of its New York labels, fired its top U.S. executives and bungled several attempts to implement a corporate succession plan.

The company has been struggling since May 1997, when the British giant promoted global music veteran Ken Berry to clean up its dormant U.S. music division.

After the corporation recorded a charge of $193 million, Berry moved to cut costs, firing EMI’s North American management team and shutting down its New York corporate office as well as several of the firm’s unprofitable record labels. Berry also replaced the U.S. heads of EMI’s Capitol and Virgin labels and restructured EMI’s Nashville and catalog divisions.

The turmoil continued with the exit of former EMI global music chief James Fifield, which followed a very public feud between Fifield and Southgate. EMI chose not to replace Fifield, but Southgate broadened the powers of Berry and EMI Music Publishing chief Martin Bandier, who were also elevated to members of the board.

Since cutting costs, Berry has done an impressive job in turning around the performance of EMI’s U.S. sector. In the last year, he installed industry veteran Roy Lott as EMI’s new U.S. deputy president and closed a deal to purchase Priority Records, the nation’s hottest rap label.

This year, EMI jumped from last to third place among the six music conglomerates in current U.S. sales, cornering an estimated 15.3% of the market, according to SoundScan, a New York research firm that monitors U.S. record sales.

For the last month, EMI has dominated the national pop sales chart with new blockbuster albums from hip-hop stars Snoop Dogg and the Beastie Boys.

Offsetting its recent gains in the U.S. market, EMI continues to perform poorly in Japan and Southeast Asia.

Three months ago, EMI reported that operating income was flat for the year ending March 31, 1998--excluding a charge for operating exceptional items to cover the closing of its New York office and Fifield’s hefty exit package.

Given its difficulties in the music business, it’s curious that EMI would want to expand into a capital-intensive, low-margin business such as the movies and risk further depressing its earnings.

In addition to the initial acquisition price for PolyGram, which could sell for anywhere from $650 million to $1 billion, the overhead and outlays for production and marketing could easily cost $700 million to $1 billion more a year.

PolyGram’s library generates annual cash flow of about $60 million to $65 million.

Over the last six years, PolyGram has invested $1.2 billion to build a movie studio and international distribution network, but has lost lots of money.

Analysts say EMI has shied away from the movie business in the past because the spiraling cost of producing and marketing films often outstrips returns.