EMI Left at the Altar--but Maybe Not for Long

With Seagram Co. on the verge of consummating a deal to buy PolyGram--the world’s largest music company--EMI Group has been left at the altar with its stock plummeting. Just a week ago, EMI was the only prospective bride among the major global music companies looking to be married off to Seagram.

Now, Seagram Chief Executive Edgar Bronfman Jr. has found a more desirable quarry and is instead in advanced talks with Dutch conglomerate Philips Electronics for PolyGram. In the strongest sign yet that a deal is at hand, Philips chief Cor Boonstra flew to New York from Europe late Monday on the Concorde to meet with top Seagram officials, presumably to seal a deal as early as this week, sources said.

So where does all of this leave EMI, which has lost its sole pursuer?

EMI Chairman Colin Southgate could not be reached for comment Monday, but he has repeatedly denied that the company is for sale. Last week, in a statement announcing that EMI had terminated negotiations with an unnamed suitor, which sources have identified as Seagram, the London-based music giant said it “remains confident about the prospects for the music industry.”

On Monday, EMI shares fell nearly 7% in British trading--which industry observers believe could be good news for companies such as Walt Disney Co. and Bertelsmann Music Group, both of which expressed interest in EMI in the past but balked at its steep price.

Sources suggest that the recent turn of events could very well force EMI’s price to tumble as the months wear on, pushing the acquisition price down within the $7-billion range--an acceptable level for either one of those companies, sources said. Disney--which longs to become a big player in music--has not initiated any recent talks with EMI, according to sources, but certainly can’t be counted out as a potential buyer.

Germany’s BMG, which approached EMI two years ago but backed off because of the price and disagreements over who would run the music company, might step up if the market value dipped to $7 billion and management issues could be resolved to its liking.

Sources also cautioned not to count out the potential for a wild-card bidder like software giant Microsoft Corp., which could do well exploiting a valuable music catalog through the Internet and is said to have had exploratory talks with EMI’s senior management at one time.

There is even speculation that Bronfman may have initially approached Philips about a PolyGram acquisition simply to drive down the price of EMI. Sources close to the negotiations deny Bronfman did that, but there is little doubt that Bronfman has made some shrewd moves in recent weeks.

“Edgar Bronfman looks real smart here,” said one top executive at a competing global record company. “You have to respect the way he has handled these negotiations. He has been able to play these two companies off one another and also convince his major shareholders to back his strategy to delve deeper into the music business.”

Bronfman’s flair for deal-making first surfaced three years ago when he quietly orchestrated Seagram’s purchase of MCA Inc., now Universal Studios Inc. Because he approached Matsushita at a moment when the Japanese conglomerate had soured on its investment in the entertainment business, Seagram was able to purchase 80% of the company for $5.7 billion--much cheaper than MCA would have fetched on the auction block.

Bronfman appears to have honed in on PolyGram at a time when Philips--similar to what Matsushita was facing three years ago--has been looking to shed its sagging entertainment assets to conform with Boonstra’s desire to focus on core activities. PolyGram could fetch as much as $10.5 billion, given its current market value and the premium a buyer would probably have to pay. But sources say Philips could let the company go for as low as $9 billion--three times what the Dutch conglomerate has invested in PolyGram over the last decade.

Bronfman could also defray the cost of the acquisition by immediately selling off PolyGram’s film assets. Analysts said the Dutch conglomerate’s film division could fetch as much as $2 billion.

If Bronfman pulls the deal off, it would mean that Seagram could walk away with PolyGram for the same price it was willing to spend for the much weaker EMI. Such a deal would not only turn Seagram’s Universal Music Group into the world’s top record company, it would also be beneficial for the future of those working at PolyGram--putting them under the wing of a corporate leader who is clearly passionate about music.

Bronfman, a sometime lyricist who has been praised for revitalizing his company’s once-dormant record division, is well regarded by the music executives who work for him.

Sources indicated that the deal being negotiated for PolyGram would involve a combination of cash and Seagram stock. Given the likelihood of a two-way due diligence process, it may take longer than usual to complete a transaction, particularly in light of the fact that PolyGram parent Philips will have lots of books to examine with Seagram’s diversity of businesses in spirits and entertainment.

With rumors of a deal circulating, Polygram shares rose $2.44 to close at $52.13 on the New York Stock Exchange on Monday, and Seagram shares rose $1.13 to close at $43.13.

In the meantime, EMI stockholders are left without the apparent suitor they thought they had when Bronfman approached Southgate. They also have a company burdened with a still-lofty price tag.

“Southgate overplayed his hand,” said one senior executive at an EMI competitor.