Investors Turn Backs on Seagram, Vivendi Deal

As executives on Tuesday formally unveiled plans for one of the biggest media combinations in history, the $34-billion Vivendi acquisition of Seagram Co. was slammed by financial markets as skittish investors drove down the stocks of all companies involved.

Many investors on both sides of the Atlantic aren’t buying the sales pitch that this combination is a 21st century bet with Seagram Co.’s Universal Studios and Polygram Music on an array of technological, wireless wonders. The hype is that the marriage will enable people to access entertainment and information at any time at any place in the world.

Critics said they don’t understand how Seagram, which only recently transformed itself from a liquor company into a music, film and theme park operation, is supposed to mesh with Vivendi. The French company only recently evolved from a water utility into a leading European telecommunications, television and wireless communications force.

“The Americans don’t have a clue, and the Europeans have no clue,” said prominent media investor Mario Gabelli, who, despite acknowledging having numerous questions about the deal, said he favors it.

Vivendi Universal will be the result of a planned three-way merger among Vivendi, the Canal Plus European pay-TV operation it controls, and Seagram. All told, the new company will be worth more than $100 billion.

Vivendi’s shares have plunged 20% in Paris trading since word of the deal leaked last week, tumbling 8.35 euros, or nearly 9%, to close at 88.1 euros. Canal Plus’ shares sank 24.4 euros, or 12%, to 178.6 euros, and Seagram’s stock fell $5.25, or 8%, to close at $58.75 on the New York Stock Exchange.

Investors question whether Vivendi will prove to be the latest foreigner to step on Hollywood’s land mines, as did Japan’s Sony Corp. and Matsushita Electrical Industrial in the 1990s.

Other concerns include whether Seagram can adequately protect its music copyrights in an era when teenagers routinely swap music for free over the Internet.

Although analysts and investors doubt it will happen, the severe downturns raise the possibility that a continued beating in the markets could threaten the deal or inspire another Seagram suitor, such as Rupert Murdoch’s News Corp., to try to trump Vivendi with its own bid.

To guard against the deal derailing, each side has agreed to fork over an $800-million breakup fee to the other party as a penalty for scrapping it.

If any of the prospective Vivendi Seagram executives were nervous about the market reaction, they didn’t show it during news conferences and analyst meetings in Paris and New York on Tuesday. Seagram Chief Executive Edgar Bronfman Jr. put the blame on short-term traders who bet on takeovers--known as arbitragers--adding that there is no agreed-upon stock price at which the parties will be forced to unravel the deal.

“There’s no cutoff point where the deal will unwind,” Bronfman said. “We very much expected this kind of reaction.”

But investors who anticipated a similar reaction conceded that the sharpness of the sell-off has been surprising. One investor, who spoke to several investors who sold their shares, said they all complained about being baffled by the deal.

“They said they didn’t understand the business, and they didn’t understand the numbers,” the investors said.

Bronfman and Vivendi Chairman Jean-Marie Messier acknowledged that they will have to work hard selling the deal to investors. As such, the two will spend the rest of the week in Europe, then return to the U.S. to pitch the deal to investors here.

Under the deal, one of the biggest in entertainment industry history, Montreal-based Seagram agreed to let itself to be acquired by Vivendi in a stock swap for $77.35 a share, for a total value of $34 billion. The resulting company will be based in Paris.

“This is the birth of a new world leader in the communications business,” Messier said. His goal, the hard-driving French business visionary confided, is “to make the Internet swing.”

Messier and Bronfman, who appeared together at the news conferences, played down suggestions that the takeover will lead to vast shake-ups at Universal, one of only six major Hollywood studios, or in Seagram’s other entertainment holdings.

“It’s not a question of the little Frenchies coming to Los Angeles to show off,” Messier said. “Hollywood studios are managed in the United States by American professionals.”

“We do not expect any management change, quite frankly, across the operating groups,” said Bronfman, who will become Vivendi Universal’s vice chairman, with overall responsibility for music and Internet activities.

During a conference call with analysts, Bronfman added that the new company will keep Universal’s theme park operation, which includes Universal Studios and CityWalk in Southern California. There has been speculation that the company might spin off its theme parks.

Pierre Lescure, chairman of Canal Plus, Europe’s largest pay-TV company, will be co-chief operating officer in charge of television and film production, including Universal. After news of the negotiations with Seagram was leaked, Lescure said he received a telephone call from media magnate Murdoch, bidding him an advance welcome to Los Angeles.

Lescure said he told Murdoch he had a villa in the south of France and had and no plans to move.

Vivendi Universal follows the pending AOL-Time Warner merger and CBS-Viacom in the trend toward wedding entertainment content and multimedia access to consumers, including via TV and computer screens and cellular phones.

Vivendi wanted images and music for Vizzavi, a pan-European Internet portal it launched Monday with Vodafone AirTouch, and for Canal Plus, which has more than 14 million subscribers.

By acquiring Seagram, Vivendi picks up vast film and TV libraries, from contemporary Universal hits such as “Erin Brockovich,” “The Mummy” and “The Gladiator” to popular small-screen syndications such as “Kojak,” “Miami Vice” and the Woody Woodpecker cartoons.

The takeover of Seagram also brings the world’s largest recording company into Vivendi’s hands, including well-known labels such as Deutsche Grammophon, Decca, MCA, Island, Motown, Geffen and A&M.; The stable of talent and the recording vault cover an astonishingly broad range of tastes, from pop music’s Elton John to Spanish tenor Placido Domingo to American rapper Dr. Dre.

Over the last four years, Messier has refashioned Vivendi, the world’s largest water company and one of Europe’s biggest trash haulers, into a media and communications powerhouse. By buying Seagram, he is seeking to make it a force to be reckoned with on both sides of the Atlantic.

“AOL-Time Warner is very much a U.S.-centric group,” Vivendi’s 43-year-old chief said last week. “A combination between Vivendi and Seagram would be a much more balanced one.”

Some European analysts, however, gave only two cheers for the transaction. Olivier Moral, a financial analyst with Handelsbanken Markets in Paris, said the value of one of the shiniest jewels in Seagram’s crown--the recording division--is uncertain because of the rapidly spreading practice of downloading music for free over the Internet, using Napster or other software.

Some analysts noted that although Messier is arguably the most highly touted whiz kid of French business, he is getting involved for the first time outside his native country in a field in which he has no experience--making movies and audio recordings.

“No foreigner has succeeded in making a franc in Hollywood, so the big question is, can Messier do it because he has the Internet in his pocket,” Frederic Sauvegrain, a partner at ODB Equities, told Bloomberg News.

“Investors are worried the purchase is going to weigh on earnings longer than expected,” Sauvegrain said.

Bronfman’s exact role in the new venture remains to be seen. Some Wall Street analysts were unimpressed by his performance at Seagram, in which he diversified a successful distiller into one dealing in media as well.

“Does Mr. Messier want the former majority shareholder of Seagram to have an important role in the new company?” Moral said. “I’m not sure he does.”

The Bronfmans, who own about a quarter of Seagram’s stock, will become Vivendi Universal’s largest shareholder, with a 7% to 8% overall stake. The board will include Vivendi’s current 14 members, Lescure and five directors from Seagram, including three members of the Bronfman family.

Under the three-way deal, Vivendi is supposed to buy the 51% of Canal Plus it doesn’t already own for at least $11.9 billion. It will spin off some segments of the French operation, so as to not run afoul of government regulations barring majority ownership of domestic TV channels.

According to Vivendi Universal’s timetable, legal documents about the transaction are to be sent to Vivendi, Seagram and Canal Plus shareholders by the end of August. From September to November, they will be asked to approve the deal at special meetings.

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James Bates reported from Los Angeles and John-Thor Dahlburg from Paris. Bloomberg News was used in compiling this report.