PolyGram Chief Says Philips Violated Pact

PolyGram President Alain Levy is alleging that Philips breached his contract when it agreed last month to sell its 75% interest in the music giant to Seagram Co., sources said Monday.

According to those sources, Philips violated the terms of Levy’s contract in various ways, not the least of which was by not informing him of plans to sell the company until the weekend before Seagram began its due diligence in early May.

By agreeing to sell PolyGram, Philips also may have violated the reporting clause in Levy’s contract. As head of the Dutch-owned global music and entertainment company for nearly a decade, he reported directly to the Philips board. With the sale, he would report to Seagram.

“It broke his chain of authority and his ability to run the company,” said a source.

Sources said Levy--who is believed to have just over a year and a half left on his contract--is close to receiving a settlement, which is not expected to exceed $10 million. His annual salary is believed to be in the $4-million range. Levy declined comment Monday.

It’s no secret that Levy is livid with Philips for initiating negotiations to sell PolyGram without his knowledge. Sources said Levy feels particularly burned because at the very time he was trying to devise strategies for PolyGram’s future, Philips was already talking to Seagram and had misled him after promising to keep him in the loop.

Levy’s settlement, which is expected to include a customary stipulation barring him from hiring PolyGram executives for a certain period of time, is expected to be finished by late Wednesday, sources said.

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The 51-year-old French executive is expected to be replaced by PolyGram Chief Financial Officer Jan Cook, who will act as interim chief of the company until the transaction is closed. The news of Cook’s appointment could come as early as today--along with an announcement that industry veteran Doug Morris will take over as the future global chairman of the combined music entity after approval of the deal by government regulators. Morris has headed Universal’s Music Group since 1996.

Seagram had planned to announce Morris’ promotion Monday but decided to wait until a provisional agreement was signed with Philips, which is expected to take place in the Netherlands today, sources said.

The provisional agreement, required under Dutch law, expands upon a letter of intent that the two parties signed last month, spelling out guidelines under which PolyGram’s management must operate while antitrust regulators are reviewing the deal. For instance, the pact would prevent PolyGram from making sudden sales or purchases before the Seagram transaction is completed.

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Analysts say that it is unusual for a corporation attempting to acquire another company to announce whom it will designate to run the combined entity before the merger is complete. The fact is that no restructuring--including firings or promotions--can begin until antitrust officials complete their review and shareholders approve the deal.

It is also highly unusual for a chief executive to leave his company before a merger or sale is completed--a move that could be destabilizing for an organization.

But some analysts say that since all mergers lead to management shake-ups, it may be more stabilizing for Seagram to announce its planned music hierarchy to alleviate employee anxiety about the direction of the company.

Although lawyers involved in the Seagram-PolyGram deal believe that government regulators will ultimately approve the transaction--valued at $10.6 billion overall--it’s worth wondering what would happen in the unlikely event that a complication arose and the merger fell apart. Philips would then be left in the awkward position of owning a majority stake in a leaderless corporation with a significant morale problem.

Levy, who is known for his no-nonsense manner, joined PolyGram as head of its French music operation in 1984, taking over direct management of the company’s U.S. operations in 1990. A year later he became head of the entire global group.

He was instrumental in transforming the quiet classical music company into a major competitor in the pop arena and helping to create a unique infrastructure for a global company comprising five regional offices around the world instead of two distinct operations--the U.S. and international markets.

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Levy was behind PolyGram’s investing more than $1 billion over the last decade to acquire a handful of prominent U.S. labels, including A&M;, Mercury, Island, Motown and half of Def Jam. But he’s been criticized for interfering with the founders of such labels as A&M; and Island, ultimately driving them out of the PolyGram family.

Levy was also responsible for pushing PolyGram into the movie business, investing more than $1 billion since 1992 in various production labels and a worldwide distribution network.

It’s rumored that competing music firms have approached Levy about potential jobs, but sources said he is currently focused on getting a settlement in hand.