Philips Puts PolyGram Empire Up for Sale

By CLAUDIA ELLER and CHUCK PHILIPS

May 7, 1998 12 AM PT

TIMES STAFF WRITERS

PolyGram, the world’s largest music company and home to such popular acts as Hanson, Sheryl Crow, U2 and Boyz II Men, went on the sales block Wednesday, promising a major shake-up in the global music industry.

The lead suitor appears to be Seagram Co., which has been in talks to buy music company EMI over the last two years and, sources said, recently approached PolyGram’s Dutch parent, Philips Electronics, about acquiring its worldwide music empire.

Industry analysts estimate that PolyGram, which owns such labels as A&M;, Mercury, Motown and half of Def Jam, could fetch something in the neighborhood of $11 billion, given its current market value and the premium a buyer would likely pay in today’s market.

Other major entertainment concerns that have expressed interest in the music business include Walt Disney Co., News Corp. and Viacom, but sources said none have held recent discussions with PolyGram or have interest in doing so. Sources at the German music and publishing giant Bertelsmann also denied being a suitor for PolyGram, as did a spokesman for Kirk Kerkorian-controlled MGM.

Seagram officials had no comment Wednesday following Philips’ announcement that it was “evaluating various strategic options” for its 75% stake in PolyGram. While Philips’ statement stopped short of divulging what those options included, sources at PolyGram said they were told the company is now in play and talks may already be underway.

The announcement affirmed longtime speculation among investors that the electronics giant has been looking to shed part or all of its sagging entertainment assets to conform with Chairman Cor Boonstra’s desire to focus on core activities.

Three years ago, Wall Street and Hollywood were bullish on the global music business, but recent downturns in the world market have caused two of the major music conglomerates--Philips and EMI--to reconsider their investments.

Philips’ apparent intentions to shed its entertainment assets also underscores the volatility of the movie business, in which PolyGram had high hopes of becoming a major player alongside such Hollywood studios as Warner Bros., Sony, Universal, 20th Century Fox, Paramount and Disney.

PolyGram has a film library of about 1,500 titles (and 11,000 hours of TV programming)--making it the third-largest post-World War II catalog in the world. The collection is composed of various boutique movie labels, including the firm’s Los Angeles-based mainstream distribution company, PolyGram Films, along with Interscope Communications, Propaganda Films, Gramercy Pictures and London-based Working Title.

Wednesday’s news came as a big surprise to PolyGram’s top music and film executives both here and on the East Coast. Even PolyGram Chairman Alain Levy was kept out of the loop until late last week and sources said he was distressed over not being informed earlier.

Levy called a meeting Wednesday morning at PolyGram’s New York headquarters, urging business to continue as usual. But top managers privately expressed concerns about the future of the company, and Philips’ announcement raised questions about the future of Levy and Michael Kuhn, who heads PolyGram Filmed Entertainment. Neither Levy nor Kuhn would comment Wednesday.

For years analysts have believed there is a strained relationship between PolyGram and Philips, particularly as Levy expanded the company’s investment into movies and television. Levy, who became president and CEO of PolyGram in 1991, has denied any rifts with Philips chief Boonstra.

On Levy’s watch, PolyGram has been transformed from a quiet classical music company into a major competitor in the pop world, investing more than $1 billion over the last decade to acquire a handful of prominent U.S. labels, including A&M;, Island, Motown and 60% of Def Jam. But over the last year, PolyGram’s business has lagged and turmoil has invaded its executive ranks.

The corporation currently ranks fifth among the six major record conglomerates in sales of albums in the U.S., with about 10% of the market.

Slowing music sales and big losses in its filmed entertainment unit have caused PolyGram’s stock to underperform.

Compared to Philips’ profit, which soared 56% in the first quarter, PolyGram’s dropped a whopping 88% to $7.5 million, attributed largely to a lack of major pop music releases. Even a worldwide box-office hit like “Bean” couldn’t offset operating losses on the film side.

Philips said it would embrace any strategic options that would “maximize long-term value” for its shareholders.

PolyGram’s stock soared on Philips’ announcement to $49.38, up $5.56, with Philips up $1.38 to $97.50 on the New York Stock Exchange. PolyGram is still far from its 52-week high of $63.06, but has climbed 20% in the past five days on strong volume. Its market value is $8.9 billion.

Seagram Chairman Edgar Bronfman Jr., an occasional songwriter whose passion for the music business is well known, has acknowledged he’d like to expand Universal’s music holdings.

But talks with EMI have been on and off for two years because Bronfman balked at the estimated $9-billion price tag.

Music industry sources suggest that PolyGram may be a better buy because it’s a more profitable company and would immediately transform Universal into the No. 1 music company in the world.

Securities analysts suggested that the Philips announcement could cause EMI stock to tumble, since it is not the only major music company available. Last week, EMI’s stock soared once again over rumors of a takeover by Seagram.

While Bronfman has come under harsh criticism on Wall Street for the poor performance of Universal’s movie division, which has been plagued by a string of flops that include “Mercury Rising” and “Primary Colors,” he has been praised for revitalizing the company’s once-dormant music division.

Though Universal is now a player in the U.S., it is still the weakest performer around the world and sorely in need of a strong international distribution system, which PolyGram or EMI could provide.

While both music companies have a strong presence abroad, PolyGram has dominated the world music market throughout the 1990s. It not only has the strongest distribution operation but has a roster of successful local talent in Latin America, Southeast Asia and Europe.

On the movie side, one of PolyGram’s biggest assets to a company like Seagram would be its international distribution operation. PolyGram self-distributes in 15 countries, including such key territories as Britain, France, Spain, Belgium, the Netherlands, Germany, Australia and New Zealand.

Universal has been unhappy with its overseas distribution partnership with Paramount and MGM in United International Pictures.

Last fall, Philips launched its own U.S. movie distribution operation and ramped up the number and budget size of the movies it would release under a new label, PolyGram Films.

Over the last six years, since the formation of PolyGram Filmed Entertainment, headed by Kuhn, PolyGram has invested more than $1 billion to put itself on a competitive footing with the majors, but so far the investment has resulted in a sea of red ink.

Philips began investing in the music business in the early 1960s and made its first big plunge into Hollywood in the early 1980s, promptly losing $140 million.

Levy engineered the company’s re-entry into the movie business six years ago, enlisting the same low-risk, measured and cautious approach to building a film studio from the ground up as he applied to the music operation.

Last year he said he was confident that by 2000, PolyGram’s film business--which last year accounted for 16% of PolyGram’s total annual sales of $5.5 billion--would grow to 20% to 25% of the whole.

While last year Levy was bullish about PolyGram’s prospects and the movie industry generally, sources say he began tempering his optimism when he saw how competitive and crowded with movies the marketplace had become--and how difficult it is to make a profit given the soaring costs of production and marketing.

For some time, investors had been concerned that amid the current bull market, PolyGram’s total earnings have been flat for several years and its stock off dramatically from its 1995 value.

This led to widespread speculation last year that Philips was considering selling part or all of its entertainment assets. At the time, Philips’ then-new chief executive Boonstra said there were no plans to abandon PolyGram.

Some Wall Street analysts were mystified by the timing of Philips’ announcement Wednesday. “Why sell it now when everything is so depressed?” asked one analyst, noting that PolyGram’s stock “hasn’t sold that low in 3 1/2 years.”

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A Look at PolyGram

PolyGram is one of the largest entertainment companies in the world. It owns the largest music company and has been rapidly expanding its movie and television operations. Its stock has lagged because of continued softness in the music business. The stock price over one year, weekly and most recent:

Wednesday close: $49.38

Music Assets

Music operations brought in 84% of 1997 sales.

Music: 84%

Film: 16%

Music assets

* A&M; Records (includes Polydor Records)

* Island Records

* London Records

* Mercury Records

* 60% of Def Jam

* Motown Records