Canal May Seek PolyGram’s Film Unit

Canal Plus, Europe’s largest pay television operator, said Wednesday that it may bid on the film assets of PolyGram to ensure a European competitor to Hollywood’s major studios.

European producers are alarmed at what might happen to the film unit if Seagram Co.’s Universal Studios Inc., one of the major U.S.-based entertainment companies, swallows up PolyGram, a European entertainment conglomerate, in a deal expected to be formally announced as early as today.

“If PolyGram becomes available, we’re interested,” Canal Plus Chairman Pierre Lescure said of the film assets during an interview at the annual Cannes International Film Festival. Lescure said he believes it is important for Europe to have a strong alternative to Hollywood’s giant studios.

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Seagram this week has been wrapping up its negotiations to buy PolyGram from its Dutch parent, Philips Electronics, in a $10.5-billion acquisition. Sources say the deal is all but closed, pending approvals today by the boards of the companies. On Wednesday, a memo was circulated to senior PolyGram record chiefs summoning them to a meeting Friday morning in New York to discuss their futures.

Seagram is known to be interested in PolyGram primarily for its music group, the world’s largest. Sources say that because Seagram executives are focused on getting the overall deal done, they have yet to address the specifics of the future of PolyGram’s film assets.

But it’s assumed in Hollywood, on Wall Street and within Seagram that Chief Executive Edgar Bronfman Jr. would sell the film unit to defray his acquisition costs, or allow it to be spun off in tandem with his acquisition of PolyGram. European producers fear the film assets will eventually end up in the hands of a Hollywood company instead of in European hands.

Jack Valenti, interviewed here Wednesday, said European alarm about a major American studio taking control of PolyGram is misplaced.

“Any of the companies in Europe can buy PolyGram. Any of them could have gone to Philips and made an offer. They still could,” said Valenti, chairman of the Motion Picture Assn. of America, which represents the interests of major Hollywood studios.

“Nationality is no longer evidence of ownership of anything,” Valenti said, noting that the Japanese firm Sony owns a major American studio.

“PolyGram is available to anybody who wants to buy it,” he said. “There are no artificial barriers.”

Although Seagram is a Canadian spirits company, its Universal Studios unit is based in Los Angeles.

London-based PolyGram has steadily built its film divisions with a strongly European slant, piecing together its international film distribution operations before entering the U.S. market as a distributor last year. PolyGram is known for its strong distribution operations in major European countries, particularly in Britain and Germany, and the company has done terrific business with such British films as “Four Weddings and a Funeral” and “Bean.” It has also won critical acclaim for such films as the Oscar-nominated “Fargo.”

But the value of PolyGram’s film assets is unclear.

PolyGram Filmed Entertainment has three major elements. One arm is its creative executives and the relationship with producers such as Working Title in London. Film industry sources are skeptical about the value of this part of the operation.

Working Title, which made “Four Weddings” and “Bean,” may be the most valuable of the producer relationships. But sources say the employment contracts for Working Title’s two heads, Tim Bevan and Eric Fellner, expire soon, meaning that any buyer has no assurance the two will continue with the company.

The second element is the distribution arm, which can be highly profitable if it’s fed a diet of strong films. But without a strong slate, the distribution operations are just costly overhead.

The company also has a strong library of films that should produce a steady cash flow for its owner, but some sources believe PolyGram has overpaid for its library and that it’s overvalued on the firm’s books.

Canal Plus is one of the world’s largest television distribution companies and the largest pay TV operator in Europe, with strong positions in France, Belgium, Spain, Italy and 10 other countries. Last year, the Paris-based company made a $2-billion acquisition of Dutch pay TV operator Nethold, boosting the company’s customer base to 8.5 million.

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Although the company is deeply integrated horizontally across the television business, it doesn’t have the vertical integration of, say, News Corp., which owns a studio and distributes its products theatrically, in video and then in television operations around the world.

Sources at Canal Plus say the company’s strategy is to become more deeply involved in the production and distribution of films, which suggests that acquiring PolyGram’s film division might be a strong move for the company. They also find PolyGram’s strong video division attractive--a unit Canal Plus lacks.

Canal Plus has made several high-profile announcements about film production and distribution in the last year, one a venture with Miramax for international film rights and production, and another with Warner Bros. to jointly finance and distribute half a dozen movies a year with producer Steven Reuther.

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Canal Plus has dabbled in Hollywood before and been burned badly by one high-profile investment. In the early 1990s, it invested in producer Arnon Milchan’s New Regency production company, helping bankroll such films as “JFK.”

Canal Plus’ biggest misstep was investing in the now-defunct Carolco Pictures, which went bankrupt

in 1995. In 1996, it spent $58 million to buy Carolco’s film library in U.S. Bankruptcy Court.

Sources say that while the company has been encouraged by European producers to step into the negotiations to rescue PolyGram and maintain its European identity, the company’s top executives have deep concerns about the price and the management.

One source at Canal Plus said he doesn’t see how PolyGram’s filmed assets could be worth more than a few hundred million dollars at most, a fraction of the billion or more that Philips might seek for that division.

Canal Plus executives also are known to be skeptical about the management approach of Michael Kuhn, who heads the film division for PolyGram.

Canal Plus has already joined forces with Pathe to create a Pan-European network of film distribution companies, which duplicates what is arguably PolyGram film’s strongest asset.

Sources in Cannes said this week that PolyGram chief Alain Levy has spoken regularly with Lescure, the executive at Canal Plus. They say Levy has been seeking a short window from Philips--perhaps 15 days--during which he and PolyGram management can find a backer or partner to buy the film division.

Times staff writer Chuck Philips in Los Angeles contributed to this report.