Seagram, Philips Confirm Talks for All of PolyGram

After a week of news reports, Seagram Co. and Philips Electronics finally admitted Thursday that Seagram is negotiating to buy Philips’ PolyGram music group, underscoring that the two parties are immersed in exclusive negotiations heading for the home stretch.

Sources close to Edgar Bronfman Jr. insist that the Seagram chief has no reason to believe that the two sides will reach an impasse at this point or that they won’t reach an agreement before a “supervisory board” of PolyGram meets Tuesday.

Thursday’s joint announcement also confirmed that the transaction being discussed involves the acquisition for all of PolyGram, not just Philips’ 75% interest. The remaining 25% is publicly owned. Seagram is said to be weighing a bid that combines cash, stock and notes.

If for some reason the negotiations between Seagram and PolyGram fizzle, it would leave a big window of opportunity for other potential suitors, including two buyout groups backing former agent and Walt Disney Co. President Michael Ovitz with assistance from investment banker Allen & Co. The name of a second interested investment group, Donaldson, Lufkin & Jenrette, Texas Pacific and billionaire investor Jerry Perenchio, also surfaced in news reports Thursday. Perenchio, a former agent, represented PolyGram on its acquisition of A&M; Records in 1989. If it bids, the group’s offer would also be a cash one, sources said.

All of the interested parties are analyzing PolyGram’s financial statements and weighing bids. In both cases, the buyout groups would take PolyGram private, then presumably reap a big profit by taking the company public at some point in the future.

Sources said Ovitz and his group are seriously leaning toward making an all-cash bid by the weekend, in advance of Philips’ board meeting. The Ovitz group also may be in talks with a major entertainment player about joining its bid. One potential partner could be media mogul Rupert Murdoch, who’s known to have eyed music giant EMI, which is also now in play.

Ovitz met Wednesday in New York with PolyGram President Alain Levy, sources said, who handed over financial data on the company and would be part of the management buyout. Sources said Philips’ chief Cor Boonstra was not present at the meeting though he gave Levy his blessing to invite Ovitz to PolyGram headquarters in answer to a request Ovitz sent by letter on Monday.

Sources said Boonstra returned to the Netherlands on Wednesday to deal with a family emergency.

Even if Seagram and Philips tie up a deal first, sources suggest that won’t dissuade Ovitz and his group from making a competing bid since PolyGram is a public company whose parent presumably has a duty to consider all bids.

It’s ironic to think that if things had turned out differently, Bronfman and Ovitz would be singing a different tune today about the potential ownership of PolyGram.

Instead, the once-close business associates--now estranged, find themselves competing against each other for the world’s largest music company.

For the last week, Bronfman and his Seagram representatives have been locked in intense negotiations in New York to acquire the global music giant from its Dutch parent, Philips Electronics.

This week, Ovitz--clearly on a mission to emerge again as a major player in the entertainment business after a humiliating failure as Disney’s short-lived president a year ago--surfaced as a potential bidder for PolyGram backed by leveraged buyout firms Forstmann Little & Co. and the Thomas H. Lee Co. Ovitz is an investor in both of their funds and is personally close to Boston-based Lee, an investor in the theatrical venture, Livent Inc., that Ovitz now controls. He also is close friends with Forstmann Little’s Theodore Forstmann, one of the nation’s top buyout financiers.

The stock market is clearly reacting to presence of new potential bidders. On Thursday, PolyGram’s shares jumped $3.31 to close at $56.31, while Seagram shares fell 38 cents to close at $42.69. Both trade on the New York Stock Exchange.

Despite all the tire kicking by Ovitz and others, sources close to the Seagram/Philips negotiations remain confident that these spoilers are coming too late to the game to stand a chance.

There are some on Wall Street and in Hollywood who believe there may be at least a hint of personal vindictiveness behind Ovitz’s attempt to rival Bronfman’s bid. More cynical observers believe it may be a more serious motivator, suggesting that Ovitz may be going after PolyGram “strictly to stick it to Bronfman” or to “get his name in the paper so he can be thought of as making big deals.”

But a source close to Ovitz dismissed those suggestions as absurd given the magnitude of a potential acquisition. The source also cited the credibility and successful track records of investors such as Forstmann and Lee, arguing that they wouldn’t get involved in such a major deal for trivial reasons.

Ovitz has resurfaced in the last eight weeks after more than a yearlong hiatus from entertainment with various entrepreneurial business ventures, including Livent, a plan to build a stadium in Carson to house a proposed NFL franchise for Los Angeles he hopes to own, and various real estate deals.

Ovitz and Bronfman were once formally linked when Ovitz advised the Seagram chief on his acquisition of MCA/Universal from Matshushita in 1995. Ovitz was Bronfman’s first choice to run the entertainment giant, but talks fell apart in the eleventh hour when the former superagent overplayed his hand and demanded too large a compensation package. The incident instantly soured Bronfman on Ovitz, and the cozy relationship deteriorated.

“I’m sure there’s a small personal element, but that’s not his primary motivation,” suggested Wall Street analyst Harold Vogel, of Cowen & Co. “Ovitz is simply seeking a way to emerge again as a more visible and powerful player in the entertainment business.”

If his backers were somehow successful in winning a bid for PolyGram (should they choose to make one), Ovitz, who as an agent worked closely with some top music clients, would probably assume a chairmanship role but would be unlikely to run the company day to day.

Analysts believe that the advantage still rests with a corporate operator such as Seagram over a buyout firm because it can save money consolidating operations. Buyout firms like the huge amounts of cash music companies predictably generate each year. In 1997, PolyGram had cash flow of $750 million.

But it takes more than cash flow to run a music company. On Thursday, analysts questioned whether Ovitz has what it takes to carve out a name for himself in the music industry--a business in which he has had little experience, outside of overseeing Disney’s abysmal recording operation and his dealings in music as a talent agent.

It’s unclear why, if Ovitz is serious about getting into the music business, he and his group haven’t as yet made serious overtures toward EMI, the other major available company.