Bronfman Sells DuPont

Former film-maker Edgar Bronfman Jr. showed last week that he still has a flair for the dramatic. Investors and analysts were kept on the edge of their seats as the 39-year-old chief executive of Seagram Co. Ltd. directed a high-stakes play that saw the Montreal-based liquor and fruit-juice maker sell a $12-billion stake in multinational chemical company E. I. du Pont de Nemours & Co. The audience is now waiting for Edgar Jr. to sweep up MCA Inc., the company behind Jurassic Park, television's Northern Exposure, the grunge-rock band Nirvana and the Universal Studios theme parks, all of which are currently owned by Matsushita Electric Industrial Co. of Osaka, Japan. The expected price of admission to MCA: between $7.8 billion and $10 billion. But waiting for the final act in Seagram's play has left many spectators in a knot. Critics panned the loss of DuPont's dependable dividends and profits, which have contributed more than 70 per cent of Seagram's earnings in recent years. That agitation was reflected in the widespread sell-off of Seagram shares last week, which knocked more than $2 billion off the company's $16.5-billion market value. By week's end, the company's stock had dropped significantly to $36.38 from $44.38 a week earlier, an 18-per-cent decline.

Despite that intense market pressure, Edgar Jr. remained relatively silent about his anticipated bid for MCA. Although the company confirmed late last week that it is negotiating to buy MCA, it revealed no other details of the proposed transaction. In fact, the only comfort for an edgy investment community was the echo of his words at Seagram's annual meeting in June, 1994. There, as he formally took the chief executive reins from his father, Edgar Sr., 65, Edgar Jr. stated: "Seagram will not take any action that will undermine our financial strength, period."

But although the stock market clearly questioned the wisdom of "going Hollywood," the company's push to broaden its asset base is nothing new. Indeed, at Seagram, the past two generations of Bronfmans have faced a daunting reality. Consumers, especially in North America, are drinking less hard liquor, including such established brands as Seagram's VO and Crown Royal ryes, Captain Morgan Rum and Chivas Regal scotch. To survive such a mature market, the company has increasingly been forced to expand and to diversify its asset base. One solution was to invest in oil company Conoco Inc. And through a takeover manoeuvre in 1981, Seagram turned the Conoco stake into a 24-per-cent holding in DuPont, for $3.6 billion.

In 1982, Edgar Bronfman Jr. joined the family company - the Bronfmans still own 36 per cent of Seagram - which was founded by his grandfather, Sam, in 1928. Edgar Jr. - who works with most other Seagram executives at offices on New York City's Park Avenue - focused his initial efforts on the core distilling business. But soon, second-guessing the young executive became a cottage industry for investment analysts. In 1987, many observers declared that a Bronfman- engineered $1.2-billion takeover of French cognac maker Martell & Cie. was excessive. Today, however, that deal is viewed as a key plank in the company's success: Martell provides the core of Seagram's Asian distribution network, where cognac is a huge seller in such booming consumer markets as Hong Kong and China. Seagram's sales in this market accounted for 24 per cent of its spirits business this year, up from 20 per cent a year ago.

Despite his success at Seagram, Edgar Jr.'s first love - the entertainment industry - has continued to enthrall him. This fascination with the glitter of Hollywood is shared by his father, Edgar Bronfman Sr., who attempted to acquire the movie studio, Metro-Goldwyn-Mayer, in the late 1960s, although he lost out to corporate raider Kirk Kerkorian. Edgar Sr. also financed several Broadway plays, including the hits 1776 and The Me Nobody Knows. For his part, Edgar Bronfman Jr. has a résumé that includes more movie credits than business courses. He skipped university to go to Los Angeles, where he read scripts and produced movies, including The Border, a forgettable 1982 film starring Jack Nicholson. As an aspiring songwriter, Edgar Jr. met his first wife, actress Sherry Brewer, when he penned the song Whisper in the Dark for her close friend, singer Dionne Warwick. The couple divorced amicably in 1991 after an 11-year marriage, and have two daughters and a son. Last year, Edgar Jr. married Clarissa Alcock, daughter of a Venezuelan oil tycoon, at a wedding where actor Michael Douglas provided a toast to the bride and groom.

Under Edgar Jr.'s direction, Seagram's business began to reflect that family interest in entertainment. In 1993, Edgar Jr. spent $3.1 billion to acquire a 15-per-cent stake in multimedia giant Time Warner Inc. of New York. That move pushed Time Warner into popping a poison-pill takeover-defence plan, and Edgar Jr. has since been snubbed in his quest for a greater role in managing the media company - he has not even been awarded a seat on the board of directors. Industry observers now predict that this holding will be sold, probably at a slight loss, if Seagram buys MCA.

Although analysts grudgingly accepted Seagram's investment in Time Warner, Hollywood has historically been a graveyard of broken dreams - even for savvy Japanese investors. Now, many question whether Bronfman can do better. Sony Corp. bought Columbia Pictures for $4.8 billion in 1989 with a vision of marrying the U.S. company's entertainment software - films and record albums - to the Japanese firm's hardware - VCRs and stereos. To date, the union has reportedly been an unhappy one: last year Sony took a $715-million writedown on the value of its stake in the movie company. The relationship between MCA and Matsushita - maker of Panasonic-brand tvs and stereos - has apparently been even rockier. Japanese executives who paid $8.5 billion for MCA five years ago were not even discussing their plans last week with MCA president Sidney Sheinberg, who complained to reporters that by ignoring MCA man- agement, Matsushita was "destroying" the business it was trying to sell.

For their part, the Japanese are said to be furious about MCA's cost overruns - $200 million and counting - on the coming Kevin Costner film Waterworld. Garth Drabinsky, the chairman of Live Entertainment Corp. of Canada, who was forced out as chief executive of Cineplex Odeon Corp. following a boardroom battle with MCA, said the "dysfunctional" relationship between senior MCA officials and Matsushita parallels his own dealings with MCA. He added that the fact that MCA executives now have uncertain status, "is simply delicious, but bittersweet."

In light of Hollywood's toll on investors, Edgar Jr.'s 1994 pledge not to jeopardize Seagram's financial strengths is now open to debate. Last week, two influential credit-rating agencies, Moody's Investors Service and Standard & Poor's, took the unusual step of commenting on market speculation by declaring that the sale of the DuPont stake could result in a downgrade of Seagram's more than $4.2-billion long-term debt-load. Furthermore, in a report to clients, Brian Lomas, a Montreal-based analyst with ScotiaMcLeod Inc., noted that MCA's potential contribution to Seagram's earnings would be about $252 million - a far cry from the $1-billion annual dividend and profit from the DuPont investment. Prior to the DuPont sale, Lomas wrote: "We don't think the rumored changes make much sense, and we respect the intelligence of Seagram's management. If the rumored sale of Seagram's DuPont investment occurs, we would become urgent sellers."

Seagram supporters appeared to be content to wait out developments and to judge Bronfman's strategy as it unfolds. Said Jacques Kavafian, an investment analyst who covers Seagram at Montreal-based brokerage firm Lévesque Beaubien Geoffrion Inc.: "It is obvious that the entertainment industry is more profitable than the chemicals industry. The growth in the long term is in the entertainment field. Some kind of ownership of MCA and its Universal Studios might make sense." For her part, Irene Natall, a Montreal-based analyst at investment dealer BZW Canada Ltd. pointed out that one reason for the drastic drop in Seagram's share price is that, "as investors, the Bronfman family may have a different time horizon from some institutional investors," who look for strong performance every quarter from their holdings.

But many observers remain skeptical about Edgar Jr.'s latest strategic tack for Seagram. One Canadian entertainment executive insists that, "on his own, Edgar Bronfman will get chewed up in Hollywood. The way this deal makes sense is if MCA is somehow rolled in with DreamWorks SKG." This super movie-production studio was recently founded by director Steven Spielberg, former Disney executive Jeffrey Katzenberg and record executive David Geffen, and has a $2-billion-plus bankroll. Their ties to MCA are strong: Spielberg made Jurassic Park, E.T. and Jaws at MCA's Universal Studios, while Geffen built its record business. In fact, contractual obligations make MCA the only studio where Spielberg can make a sequel to Jurassic Park. Furthermore, Seagram's senior executive vice-president, Stephen Banner, was a lawyer involved in negotiations between Matsushita and MCA prior to joining the company. The father of Edgar Jr.'s close friend, Hollywood agent Mike Ovitz, was a Seagram's distributor for more than 45 years.

Still, if Seagram's MCA bid succeeds, Edgar Bronfman Jr. must then prove that, under his direction, Seagram and its allies can produce hit after hit - for moviegoers and shareholders alike.

Maclean's April 17, 1995