Seagram to Blend PolyGram/Universal Units; Will Eat Costs

Several months into one of the biggest mergers the entertainment industry has ever seen, Seagram Company has announced that many of the film and video operations it acquired in its buyout of PolyGram NV will be absorbed into its Universal Studios division. A flurry of pink slips for PolyGram employees, a shuffling of Universal management following a box-office slump, and a hefty write-down for the current quarter are all part of the script.

The saga began last May when Montreal's Seagram Ltd. negotiated a multi-billion-dollar takeover of PolyGram, then largely owned by Netherlands-based electronics conglomerate Philips NV. PolyGram's assets included the PolyGram music label and PolyGram Filmed Entertainment (PFE) and its subsidiaries: PolyGram Films, PolyGram Film International, PolyGram Television, PolyGram Video, Gramercy Pictures, October Pictures, Propaganda Films, Working Title Films, and Interscope Communications.

The PolyGram buyout---variously reported at between $10.2 and $10.4 billion---was predicated on Seagram's plan to spin off many of these subsidiaries to pare down the real cost of the acquisition. Seagram hoped to raise as much $1 billion through parting out the PolyGram empire.

But with the exception of a $235 million transfer of a 1300-title film library to Metro-Goldwyn-Mayer Inc., Seagram's big estate sale flopped. (The company did raise $4 billion last year by selling its domestic TV assets to Barry Diller's USA Networks.) Months of fishing among the sea of potential buyers for assorted PolyGram assets yielded few nibbles and no bites. "I guess they didn't get the price they wanted," said Merrill Lynch analyst Jessica Reif Cohen---one of the year's great understatements. On December 10, the liquor-and-entertainment giant publicly accepted its fate and announced that it will roll most PolyGram units into its own Universal Studios entertainment division. Seagram will "take charges" (i.e., write off a loss) of as much as $700 million this quarter as a result.

Units of PolyGram Filmed Entertainment---whose president, Michael Kuhn, stepped down last Thursday---will now report to Universal Pictures President Chris McGurk, and Universal Television and Networks Group Chairman Blair Westlake will oversee PFE's television operations. McGurk and Westlake have survived a recent churning of management at Universal. In mid-November, the perpetually under-performing Frank Biondi departed as chairman of Universal Studios, and little more than a week later, Casey Silver took a hike from his position as chairman of Universal Pictures. (Silver, a 12-year Universal veteran, will reportedly continue working with the company as an independent producer.) Universal Studios President and COO Ron Meyer assumed the duties of both men.

Silver's departure came after a disappointing box-office debut for Babe: Pig in the City, Universal's $90 million holiday offering. The talking-pig flick had the misfortune of competing against the Disney/Pixar production A Bug's Life, which pulled in $46.5 million its first weekend. Pig in the City did only $8.5 million in the same period.

Universal is learning the hard way that you're only as good as your last time at bat: The studio hasn't had a major hit since The Lost World: Jurassic Park in 1997. Primary Colors, a political potboiler with John Travolta as a Bill Clinton-type president, and Mercury Rising, both Universal productions, tanked earlier this year, and current release Meet Joe Black is performing similarly. Universal Pictures is expected to lose $65 million for the second fiscal quarter, ending December 31, and it will probably finish in the red for the fiscal year ending June 30, 1999.

Seagram CEO Edgar Bronfman, Jr. and company stockholders hope that the influx of talent from PolyGram will revive Universal's position in the film industry. One likely outcome of the ongoing integration is that Gramercy Pictures and October Pictures, both "art house" companies, will be combined. The larger deal includes Universal's assumption of PFE's $300 million film-financing debt, underwritten by Sumitomo Bank and ING Bank.

Although Seagram isn't excluding the possibility of selling off any of its new PolyGram properties, their absorption into Universal will make that relatively difficult, according to several reports. Among the PolyGram staffers likely to receive their walking papers are approximately 60 full-time workers at PolyGram TV and another 3000 at the PolyGram music label, whose duties will be assumed by their counterparts at Universal Music Group.

Several PolyGram films now in production or about to be released will likely wear the Universal badge. Among them are Notting Hill, a Working Title romantic comedy with Julia Roberts and Hugh Grant; The Green Mile with Tom Hanks; and Arlington Road with Jeff Bridges and Tim Robbins, scheduled for release next March.