This article was originally published in Maclean's Magazine on November 16, 1998
Among the qualities possessed by Edgar M. Bronfman, the chairman of Montreal-based Seagram Co., are a palpable sense of confidence and an encyclopedic knowledge of his family's history. So when a shareholder at Seagram's annual meeting last week asked a critical question about the company's performance under his son, Edgar Jr., the 69-year-old Bronfman did not hesitate. He cited his father, Sam, who fended off angry investors many years ago by referring to the large number of shares he owned in the company. Samuel Bronfman told them not to worry - in a response that Edgar Bronfman echoed - because "I have more to lose than you do, and that is my answer to you."
Citing such precedents helps to soothe Seagram's shareholders, who have traditionally been able to count on unspectacular, but steady, profits and growth. But since the arrival of the now 44-year-old Edgar Jr. as president in 1989 and then chief executive officer in 1994, Seagram has slipped from what is known in financial circles as a reliable "trust me" stock to "show me" status - meaning it is now regarded skeptically by many investors.
The reason is the younger Bronfman's decision to move Seagram away from some of the businesses that have provided its most reliable profits in the past, and into the high-profile, but equally high-risk, entertainment business. And although he announced earnings for the most recent quarter that were better than some analysts had expected, Bronfman was obliged to plead with shareholders at the meeting for patience in his efforts to reshape the company. He acknowledged that the three-year restructuring period had been "difficult and trying," but said Seagram now faces the future with "quiet but considerable confidence."
Still, it confronts that future without some once-key assets. Seagram reported a four-per-cent drop in earnings for the most recent quarter compared to the same period last year, due largely to the continuing economic slump in Asia. Net income totalled $1.78 billion, but that figure included $1.64 billion from the sale of its profitable Tropicana juice unit to PepsiCo last August. When that gain and results from discontinued operations are excluded, earnings before interest and taxes for the quarter fell 18 per cent to $145 million, compared with $178 million the previous year.
The Tropicana sale is just one of the latest - and by no means the biggest - in a series of sometimes dizzying steps that Bronfman has taken to shift the company's focus to entertainment. Last June, he announced plans to buy the Dutch-based PolyGram NV recording and film company for $15.9 billion. The deal is expected to close in early December and will mean that, under Bronfman's leadership, Seagram has spent more than $30 billion buying into the entertainment business. Other holdings include the Universal Music Group and the Universal movie division, which Seagram bought in 1995 for $8.7 billion.
Those acquisitions may, as Bronfman insisted, better position Seagram to face shifting tastes in the next century. He and supporters point to the fact that liquor consumption has fallen steadily since the 1980s, so that the company had to seek new areas for future growth. By next year, sales of liquor and wine will account for about 28 per cent of revenues, compared with 38 per cent for music and 34 per cent for movies and theme parks. But the problem for Bronfman is that, so far, most of his major moves appear to have been either ill-timed, or poorly thought out. In 1995, Bronfman sold the 24-per-cent stake that Seagram had held in the DuPont chemical company since 1981 for $13.5 billion. He was supported by Edgar Sr., who in his memoirs called DuPont "boring."
But insiders suggest that the sale was opposed by Edgar Sr.'s brother, Charles, who is co-chairman of Seagram. "Charles never saw the logic of selling," says one longtime Montreal associate. "But he is not the sort of person to cause a family rift over business." The results suggest the skeptics were right. DuPont stock has doubled in value since the sale, meaning that Seagram forfeited close to $14 billion because of its timing. At the same time, Seagram stock barely budged during the long bull market.
Similarly, Seagram's moves into the movie and music businesses so far amount to major bets that have produced minimal and sometimes disappointing returns. Universal Studios accounted for about 10 per cent of overall cinema ticket sales in North America when Seagram bought the company but, so far this year, its share has fallen to four per cent. Although earnings and cash flow have been rising, that is because of growing film-library sales to television and video, rather than new movies. And since the purchase, Seagram has proven unable or unwilling to keep many of the movie company's highest-ranking executives in place. In fact, Frank Biondi, the chairman and chief executive officer of Universal Studios, and a man personally wooed by Bronfman, is expected to leave his post in the spring because his responsibilities have been diminished by Seagram's decision to sell off majority control in the USA Networks television company last year.
Seagrams's venture into the music business is facing similar problems. The company's purchase of PolyGram will give it an overall market share of 22 per cent of the industry. But size is no guarantee of profitability. For example, while PolyGram's revenues rose three per cent in the first half of this year, earnings declined by 75 per cent - because of such factors as increasing promotional costs and royalty payments to some stars. Seagram's stable will now include artists ranging from Shania Twain to Luciano Pavarotti to the rock group U2.
At the same time, music sales are falling worldwide and there are concerns that new technologies, such as transmission of music over the Internet, may further cut into sales of such traditional products as cassette tapes and compact discs.
Perhaps most ominously for members of the Bronfman family, moves to remake the company have had the twin effects of diluting their control over Seagram and dramatically increasing the debt load of a company that has always considered its liquidity one of its great assets. Prior to the PolyGram deal, Seagram debt totalled about 15 per cent of capital; that amount will soon be close to 40 per cent. Bronfman had hoped to dramatically reduce debt by selling off PolyGram's film unit for about $1.5 billion. But when it finally made a deal to sell the library part of the film assets to Metro-Goldwyn-Mayer Pictures Inc. in October, the price was only about $360 million. That leaves total debt at about $13.8 billion. As a result, two bond agencies - New York City-based Moody's Investors Service Inc. and the Canadian Bond Rating Service - cut their ratings of the company's debt last month. As well, the PolyGram deal will significantly reduce the Bronfman family's holdings in Seagram. At present, Edgar Sr. and Charles, between them, hold 35 per cent of stock, worth an estimated $6.9 billion. That figure will decline to 29 per cent after the sale is closed.
Not all the news is bad. Seagram officials say they expect to achieve cost savings of $460 million annually by merging the two record companies. Revenue was up at the USA Networks, in which Seagram has kept a 45-per-cent share. And Edgar Jr. said he expects a "turnaround" at Universal Studios later this year with the release of a new crop of movies during the peak pre-Christmas season. His remarks were reminiscent of a previous speech in which he called Seagram a "re-energized" company that had taken steps to "strengthen our already sound balance sheet." That was in November, 1997 - a year before profits fell and debt increased dramatically. The question Edgar Bronfman Jr. must now answer is when the restructuring will end - and his always-rosy future forecast begin.
Maclean's November 16, 1998