Seagram in Talks to Buy Remaining Stake in Def Jam for $100 Million

Seagram Co. entered advanced talks this week to pay about $100 million for the remaining 40% of Def Jam Music Group that it doesn’t already own, sources said.

Although several elements of the deal are still unresolved and there is a remote chance that the pact could unravel, sources predicted that an agreement is likely to be consummated as early as next week. Def Jam--currently the hottest record label in the music business--was previously 60% owned by PolyGram, which Seagram purchased in December for $10.4 billion.

Last month, Seagram’s Universal Music Group restructured its U.S. record division and combined Mercury with Island and Def Jam to form one of its two major outposts on the East Coast. Sources said Seagram has plans to turn Def Jam into the black music arm of the newly restructured unit, where Def Jam Chief Executive Lyor Cohen is expected to take on expanded duties. Label founder Russell Simmons will retain his title as chairman of Def Jam.

Def Jam has dominated the U.S. pop charts for the last 15 months, churning out a series of hit albums by such controversial rap stars as Foxy Brown, DMX, Jay-Z, Redman, Onyx, Method Man and Def Squad. The label, which has two titles this week in the Top 10, accounts for nearly 4% of all current albums sold in the U.S. so far this year, according to SoundScan.

Def Jam is such a hot brand in pop music these days that several executives at Island and Mercury even kicked around the idea of renaming the entire Island/Mercury unit Def Jam--although such a move is unlikely, sources said. In the months ahead, Def Jam will move its offices in New York from SoHo into the former PolyGram headquarters on 8th Avenue, which will also eventually house Seagram’s Universal Records and Motown divisions.

There is speculation that Hiriam Hicks, president of Island’s black music division, and Clarence Avant, chairman of Motown Records, may exit Universal Music Group before the end of the year. It is unclear what effect the restructuring will have on the future of the two dozen employees in Island’s black music department who helped Hicks transform such unknown R&B; acts as Dru Hill and Kelly Price into pop stars.

Officials at Seagram’s Universal Music Group and Def Jam declined to comment.

Def Jam was launched 15 years ago by Simmons and his original partner, Rick Rubin, who together pioneered a new strategy for promoting rap records in the 1980s without the aid of radio airplay. Employing posters and videos to promote street buzz, Def Jam was able to turn such underground acts as Public Enemy, the Beastie Boys, LL Cool J and Run DMC into stars who sold millions of albums.

PolyGram paid $33 million for a half stake in Def Jam after a 1994 falling-out between Simmons and Sony Music. PolyGram’s board of directors quickly approved the purchase of an additional 10% of Def Jam after the label turned in a profitable 1994 but vetoed a $60-million proposal last year to buy the remaining 40% stake.

Although PolyGram made money manufacturing and distributing Def Jam product between 1995 and 1997, sources said the label itself lost nearly $20 million--about the same amount of red ink Def Jam racked up during its previous tenure at Sony. In 1998, however, Def Jam had the most profitable year in its history, generating about $40 million in profit on an estimated $176 million in sales, sources said.

The original buyout formula negotiated between PolyGram and Def Jam was unusual, sources said, because the sale price was predicated on a percentage of total revenue--not profit. Negotiations have broken down several times during the last few months, caused primarily by disagreements about how to interpret the formula and value the label, sources said.

Seagram initially balked at the $125-million price asked by Simmons and Cohen, offering to pay slightly more than $90 million, sources said. The two sides settled on $100 million last week in an effort to complete the transaction during 1999 while Seagram was implementing a massive restructuring of its global music division.

It is unclear how Def Jam’s vision will fit into Seagram’s corporate culture. Simmons and Cohen have built the company on releasing aggressive street-edged rap music laced with violent and sexually explicit lyrics--something Seagram has made a point to distance itself from in the past.