Seagram Said to Be Close to PolyGram Deal

As early as this weekend, PolyGram, the world’s largest music company, could change hands, with Seagram Co. still in the clear lead as the likely buyer.

Despite last-minute jockeying by some New York buyout firms, Seagram chief Edgar Bronfman Jr. is on track to spend as much as $10.5 billion to add PolyGram to his Universal Studios Inc. empire. Seagram executives have been in round-the-clock discussions all week in New York, poring over contracts and scouring the books of PolyGram’s music and film divisions.

Bronfman has bought an exclusivity period to negotiate with PolyGram parent Philips Electronics until Monday morning, sources said. Similarly, three years ago, Bronfman effected an exclusive negotiating tie-up with Japan’s Matsushita Electric Industrial to buy MCA/Universal.

The New York Times reported Wednesday that two of the country’s largest leveraged buyout funds, Forstmann Little & Co. and Thomas H. Lee Co., are considering making a bid for PolyGram. Sources confirmed that former super-agent Michael Ovitz, who is close friends with both Lee and Theodore Forstmann and brought the two together, is part of the group as well. Ovitz is expected to meet this week with Philips representatives to gather financial data on PolyGram to potentially formulate a bid.

Presumably, the buyout group would try to link up with PolyGram chief Alain Levy and other PolyGram executives, although sources said Levy has been explicitly instructed by Philips not to explore a management buyout unless the deal with Seagram falls apart.

Sources say it is highly unlikely that Ovitz or any other potential suitor could derail the Seagram deal. While Philips is obligated to present all bids to its shareholders, sources believe that a board-approved deal with Seagram could be announced as early as Sunday. The deal would be subject to approval by shareholders of Philips, which owns 75% of PolyGram, as well as the remaining public shareholders.

As a corporate entity, Seagram is clearly better positioned than any financial firm to buy PolyGram and make the most of the acquisition because it can integrate the music giant into its existing entertainment company and significantly save money by slashing overhead and improving efficiency.

“It makes more sense for an operating company like Seagram because it can spread the overhead over more units, consolidate the operations and realize economies of scale with one distribution organization,” said Harold Vogel, an analyst with Cowen & Co.

Moreover, analysts say Seagram is in a better position to get capital quicker than an investment firm, which would have to cobble together additional equity financing to complete an acquisition.

“It would be much more in Philips’ interest to do a deal with Seagram, since on paper it’s a much easier transaction to accomplish because of Seagram’s financial strength,” said analyst Jeffrey Logsdon. He suggested that a company like Seagram “could access $10 billion within a couple of weeks.”

Logsdon said it could take a minimum of 60 days to complete a merger given the time it takes for the Securities and Exchange Commission to review proxy materials and to get government and shareholder approval.

While the deal is not expected to raise any antitrust concerns, it could undergo scrutiny simply because it is a horizontal merger between two major competitors.

If Seagram, which owns Universal Studios, purchases PolyGram, it would instantly become a global powerhouse with nearly a dozen record labels under its roof--more than twice that of any of its competitors. Sources said Universal’s music division could save as much as $300 million by consolidating publishing, manufacturing and distribution operations.

Seagram is likely to fold the artist rosters of PolyGram’s weaker U.S. labels into the Universal system and remove the highly paid executives who run them. Seagram’s Universal Music Group employs about 3,500 people, while PolyGram has about 12,000 people around the world--many of whom would probably lose their jobs because of redundancies.

The Canadian spirits company would most probably try to sell PolyGram’s less successful film operations and its 1,500-title library, which could defray the cost of the acquisition by more than $1 billion. If Seagram kept the film assets, it would undoubtedly consolidate the operations with its Universal Pictures to reduce overhead costs.

If Seagram winds up with PolyGram, sources said Levy is likely to be out of a job because Bronfman is a big supporter of Universal Music Group Chairman Doug Morris. Bronfman handpicked Morris after the industry veteran was fired by Time Warner.

Morris has bolstered the company’s U.S. market share by installing a new management team and bringing successful Interscope Records into the Universal fold after the controversial label was dumped by Time Warner.

While Universal Music has almost no international presence, PolyGram has dominated the global market throughout the decade with a deep and potent list of local stars in Latin America, Europe and Asia. In the U.S., PolyGram has a roster that includes such acts as Hanson, Sheryl Crow, U2, Boyz II Men and Van Morrison.

The days when companies could rely on superstar career acts to drive earnings are over, making it that much more imperative that labels have strong management in place to recognize new talent and develop potential hits.

Since Seagram acquired Universal three years ago, Bronfman has assembled a team of some of the industry’s top music managers, including Morris and Interscope co-founders Jimmy Iovine and Ted Field. A PolyGram acquisition would bring such executives as Mercury Records chief Danny Goldberg and A&M; Records’ John McClain into Universal Music’s family.

On Wednesday, PolyGram shares rose $1.25 to close at $53, though they remain well below their 52-week high of $63.06. Seagram shares rose 50 cents to close at $43.06, near their 52-week peak of $43.44. Both trade on the New York Stock Exchange.