Seagram Plans Major Revamp

In the most massive restructuring in the history of the music industry, Seagram Co. has developed plans to slash $300 million in costs annually from the PolyGram and Universal music groups by integrating dozens of business operations in 44 markets around the world. The unprecedented move will result in the shuttering of well-known labels, the closing of plants and warehouses as well as the loss of thousands of jobs.

Some of the nation’s best known record labels--including Motown, Geffen, A&M; and Mercury--are expected to undergo significant downsizing as Seagram attempts to transform itself into the largest and leanest music conglomerate in the world.

Seagram plans to consolidate its U.S. music division into four large groups and install an aggressive new management team made up of some of the industry’s youngest and most successful entrepreneurs, including Interscope Records’ Jimmy Iovine and Def Jam Records’ Lyor Cohen, sources say.

Internationally, the combined company is expected to rely heavily on the strengths of PolyGram, which has been the industry leader for a decade. The U.S. organization is expected to become a hybrid of both the PolyGram and Universal music groups.

The reorganization--which will follow the December completion of Seagram’s $10.4-billion purchase of PolyGram --is expected to begin in January and will take at least until next summer to implement.

Rival music industry executives predict that the combined entity--to be called Universal Music Group--will emerge as a formidable competitor, accounting for at least 25% of all music sold around the world. Analysts suggest that the massive restructuring will provide Universal with unparalleled economies of scale guaranteed to boost operating margins and position the conglomerate for strong revenue growth during the next three years.

“After Universal completes the consolidation, it should be able to outperform anybody in its peer group,” said Michael B. Nathanson, an analyst with Sanford C. Bernstein & Co. “Because of its size, it will definitely have the most attractive cost structure of any of its competitors. Guys like Sony or [Time] Warner can’t possibly cut costs that deep. Universal will benefit by keeping PolyGram’s highly profitable international operation intact and emerge with a leaner, more efficient U.S. operation that should give them the highest margins in the business.”

The reorganization is certain to cause management discord and morale problems in the months ahead as Seagram attempts to merge the different cultures and operations of the two companies. Several competing record chiefs said they hope to use that window to raid the company for executives and artists.

The merger radically alters the architecture of the business itself by shrinking the number of global competitors from six to five: Universal, Sony, Bertelsmann, Time Warner and EMI. It is unclear how many jobs will be eliminated in the restructuring, but sources estimate that nearly 20% of the 15,500 workers employed by PolyGram and Universal could be let go. It’s not yet clear where the layoffs will occur, but both A&M; and Geffen, which are based in Los Angeles, are sure to be affected.

The timing of the reorganization is significant in part because it comes as rising talent costs, consolidation of retailers and economic turmoil in Asia and other world markets have combined to erode music profits. With global demand for music flat and new forms of piracy on the rise, some analysts say it will be difficult for Seagram to sustain long-term growth. Seagram has said it is counting on exploiting changes spurred by the Internet and digital technologies to bolster sales in the future.

The restructuring plan follows months of intense integration meetings between top brass at Seagram, Universal and PolyGram. A blueprint for the U.S. consolidation was drafted by Universal executives Doug Morris, Zach Horowitz and Bruce Hack and submitted two weeks ago to Seagram chief Edgar Bronfman Jr.

A Universal Music spokesman said Monday that no final decisions have been made, but he declined to comment further.

Details about the consolidation plan and management structure are not expected to be announced until late December, but sources say the U.S. division will be divided into four large companies--two on the East Coast and two on the West Coast. Morris, an industry veteran with a track record for discovering and grooming successful managers, has already lined up an ambitious executive team to run the proposed units, although no contracts have been signed.

In Los Angeles, Interscope Group and MCA Group will dominate the landscape.

Universal plans to purchase the remaining half of Interscope, home to such diverse acts as Nine Inch Nails, No Doubt, Kirk Franklin and the Wallflowers. Universal, which bought a half-stake in the successful Westwood label three years ago for $200 million, has already paid Interscope co-founders Iovine and Ted Field about $85 million and will write a $40-million check for the balance before the end of the year.

Universal will downsize the struggling Geffen and A&M; labels and fold them under the umbrella of an expanded Interscope Music Group, which will be run by Iovine, 45, and Field, 46, and the company’s 46-year-old president, Tom Whalley. Geffen and A&M;, home to such acts as Beck and Sheryl Crow, will maintain their own talent scouts and marketing divisions and continue to release music under their own logos but will operate with reduced staffs and artist rosters. It is unclear whether Geffen Chairman Ed Rosenblatt and A&M; Chairman Al Cafaro will have any role in the new structure.

MCA Records Group will survive the restructuring unscathed and continue to be run by Jay Boberg, a 40-year-old entrepreneur who came to Universal after selling a label he ran that discovered such acts as R.E.M. MCA Nashville, the top country music label in the business, will continue to be run by Bruce Hinton and Tony Brown.

In New York, upstart Universal Records will emerge as a powerhouse with Def Jam and a downsized Motown folded into its new infrastructure. The company will continue to be run by Chairman Mel Lewinter with assistance from Jean Riggins, the 43-year-old president of black music. Kedar Massenburg, the 35-year-old former manager who discovered soul singers D’Angelo and Erykah Badu, will be brought in to run Motown following the exit of George Jackson. It is unclear what role Motown executive Clarence Avant might play after the restructuring.

Def Jam’s Cohen, 39, is likely to take on a key role at Universal if Seagram can work out a deal to purchase the remainder of Def Jam, the hot PolyGram label that has dominated the pop charts this year with hits by such acts as Jay-Z and DMX. Cohen and Def Jam founder Russell Simmons, 40, are said to be asking more than $70 million for the 40% of the label that Seagram does not already own, but it is unclear whether Seagram will pay that much. It is also unclear what role Simmons might fill at the organization if the sale goes through.

Island, home to U2 and Dru Hill, will be combined with Mercury, home to Kiss and Bon Jovi, to form Seagram’s other major outpost on the East Coast. Staff and artist rosters will be cut at both labels, and PolyGram distribution chief Jim Caparro, 46, will take over as chairman, with John Reid, the 37-year-old chairman of PolyGram Canada, brought in as president.

Island executives Hiriam Hicks, 35, and Johnny Barbis are expected to take on new roles at the combined company, but Island President Davitt Sigerson and Mercury chief Danny Goldberg are likely to leave. Luke Lewis will continue to run Mercury’s highly profitable Nashville division, which will remain operating as a stand-alone label--although back-office functions for the company will be combined with MCA’s Nashville operation.

Under the plan, each of the four U.S. units would be pared to about 100 recording acts and 175 employees and expected to generate an estimated volume of at least $200 million per year in album sales. Each company will maintain its own marketing and promotion staff, but payments to independent promoters and industry tip sheets will be slashed. The Interscope/Geffen/A&M; unit will end up being a somewhat larger structure and be expected to generate more than $300 million.

The combined entity’s distribution system will be run by Universal’s Henry Droz and Jim Urie with the assistance of several top PolyGram distribution executives. In the United States, the corporation will integrate sales forces and utilize a blend of manufacturing plants and warehouses from both organizations. About half of all U.S. plant warehouses currently operated by PolyGram and Universal will be shut down or sold during the next year.

Outside of the U.S., Seagram will fold its Universal sales force into PolyGram’s sales force and turn over all manufacturing and distribution duties to the PolyGram team in April when its current deal with BMG expires. Universal previously had no manufacturing or distribution system outside the U.S.

Universal currently does less than 20% of its business outside the U.S., while nearly 80% of PolyGram’s revenue has been generated outside the United States by local artists in their respective markets.

Universal has decided to shutter most of its own systems outside the U.S. and adopt PolyGram’s music publishing, auto-processing, financial and royalty systems as the backbone of its operation around the world. Universal will appoint PolyGram executives Jonathan Similansky and Jonathan Manley to head the company’s human resources and information technology divisions.

“There is no question that management is making a very strong effort to integrate the Universal operations with those of PolyGram,” said Christopher Dixon, media analyst for PaineWebber.

To stabilize the combined entity’s presence around the world, Universal international chief Jorgen Larsen has already secured the services of most of PolyGram’s key global executives, including Norman Cheng in Asia, Kei Ishizaka in Japan, Wolf Gramatke and Tim Renner in Germany, Pascal Negre in France, John Kennedy in Britain, Manolo Diaz in Latin America and Theo Roos in the Netherlands.

Universal also plans to create a centralized catalog division to sell the thousands of titles in the PolyGram and Universal vaults. Revenue generated by this sector, headed by Bruce Resnikoff, will be directed to the labels from which each catalog item is culled.

Rudi Gassner, chief executive of BMG Entertainment International, predicted that Seagram’s new Universal Music Group will alter the balance of power in the global record business.

“Once Seagram overcomes the integration problems inherent in every takeover, the new company will emerge as a formidable competitor,” Gassner said.

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Reverberations

The combination of the PolyGram and Universal music groups into the largest music company in the world will involve a massive reorganization, thousands of layoffs, the downsizing of historic labels and the casting-off of dozens of acts. Analysts say the result will be a large, lean firm led by a formidable group of industry veterans and rising young executives.

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THE FOUR U.S. UNITS

Under the plan, each of the four U.S. units would be pared down to about 100 recording acts and 175 employees and would be expected to generate an estimated volume of at least $200 million per year in album sales.

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Who’s In Charge?

Doug Morris: Chairman and CEO of Universal Music Group

Bruce Hack: Vice chairman of Universal Music Group

Zach Horowitz: President and COO of Universal Music Group

Jorgen Larsen: Chairman and CEO of Universal International

Henry Droz: President of Universal Music Distribution

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WEST COAST

Interscope Music Group: Under Jimmy Iovine, Ted Field and Tom Whalley; includes Interscope Records, Geffen Records and A&M; Records

MCA Records Group: Under Jay Boberg; MCA Nashville: Bruce Hinton and Tony Brown

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EAST COAST

Universal Records: Under Mel Lewinter, Jean Riggins and Lyor Cohen;

Motown: Kedar Massenburg, Clarence Avant ; Def Jam: Russell Simmons

Island/Mercury Group: Jim Caparro and John Reid with Hiriam Hicks, Johnny Barbis and Steve Greenberg; Mercury Nashville: Luke Lewis

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INTERNATIONAL

Universal Music International: Under Jorgen Larsen, with Norman Cheng in Asia, Kei Ishizaka in Japan, Wolf Gramatke and Tim Renner in Germany, Pascal Negre in France, John Kennedy in Britain, Manolo Diaz in Latin America and Theo Roos in Holland.