Cet article a été initialement publié dans le magazine Macleans (24/04/1995)
Last week, as investors tried to get used to the idea of Seagram Co. Ltd. as a show-biz giant, America's newest movie mogul was in California. Edgar Bronfman Jr. was visiting the institution that redefined his company: the huge entertainment conglomerate MCA Inc. The 39-year-old Seagram chief executive had just completed an $8-billion deal to buy 80 per cent of the shares of MCA Inc. - the company that gave the world Jurassic Park, Schindler's List and E.T. - from Japanese electronics giant Matshushita Electric Industrial Co. It was a move that the scion of the Bronfman family whisky fortune had been building towards for several years. His first foray into the entertainment industry came last year, after Seagram accumulated a 15-per-cent stake in the vast publishing and cable-TV empire Time Warner Inc. of New York City. Bronfman explained at the time that he wanted Time Warner's distribution assets as much as he wanted its content producers. "Cable is a very valuable asset," he told Maclean's last June. "We specifically would not want to buy into a company that was entertainment only. There's a large degree of risk and volatility in entertainment-only assets."
By last week, Bronfman appeared to have a change of heart. He was not giving interviews, but during a conference call with entertainment analysts to explain the MCA purchase, he stressed content, not distribution, as the most important part of the business. "Content is the actual product the consumer pays for, regardless of the distribution mechanism," he said. "It is the most vital link in the value chain of the communications entertainment industry."
With MCA, Seagram has bought almost nothing but content. The firm's assets include Universal Pictures, which has produced a string of major hits and has a movie library that is among the largest in the world. MCA also owns several music companies including MCA Records, Geffen Records and Uptown. It has a television production unit (Murder, She Wrote, Northern Exposure), a book publisher, theme parks and a video distributor. It also has a major interest in Cineplex Odeon Corp., the Toronto-based theatre chain, along with part-owner Charles Bronfman, Edgar Jr.'s uncle and a co-owner of Seagram.
But theories on what defines the entertainment industry aside, it was Bronfman's way of taking over MCA that shook Wall Street investors. He funded his acquisition by selling a highly profitable stake in E. I. du Pont de Nemours & Co., the chemical company that brought in more than half of the liquor company's profit of $1 billion last year. Seagram's share price swiftly dove $8 to $36.38 as dividend-seeking shareholders bailed out for more assured investments. Some analysts suggested that Bronfman was seduced by the glamor of the movie industry. By the end of last week, however, sentiment had begun to turn, and even such conservative investors as Canadian pension funds showed signs of warming to the value of entertainment investing. According to some experienced investors, it is part of a new trend to investment in intangible assets like movie studios and recording companies. And, they add, the business may not even be as risky as it first seems to investors more accustomed to hard assets and predictable cash flow.
That conclusion is supported by the Royal Bank's Rob Morrice, senior manager of entertainment software. He says that of the loans totalling $500 million that he has made to the entertainment industry in the past five years, none has gone bad. "Astute people around the world are buying up intellectual property, whether it be Bill Gates of Microsoft buying original art, or Rupert Murdoch buying textbook publishers," said Morrice. "In the 500-channel universe, in the Internet world, the thing that people are going to be tuning into is content."
There are uncertainties, however, about the MCA investment. In the short term, it is struggling to release Waterworld, an expensive action-adventure movie starring Kevin Costner, which some Hollywood insiders are likening to such expensive flops as Heaven's Gate and Ishtar. MCA has reportedly already spent at least $200 million on the project, about five times the cost of making an average Hollywood movie. When marketing and distribution costs are added in, the movie will likely have to gross more than $300 million just to break even. That is more than possible if the movie is a hit: director Steven Spielberg's Jurassic Park earned $1.2 billion in box office, video and merchandise revenues. But if a film does not catch on, $300 million can seem a huge sum. The Quick and the Dead, a recently released cowboy movie starring Sharon Stone, which moved out of theatres quickly, has taken in box-office revenues of just $25 million.
In addition, Bronfman and his father, Seagram's chairman Edgar Sr., are expected to make some changes to the company's management. They were in meetings for much of last week with MCA's chairman, 82-year-old Lew Wasserman, and president Sidney Sheinberg, 60. The two industry giants have important personal friendships with Spielberg, whose movies are MCA's greatest all-time money-makers. But Spielberg, music executive David Geffen and Jeffrey Katzenberg, former head of Disney studios, have just launched a multibillion-dollar production venture called DreamWorks, which could become a major competitor for MCA.
Bronfman apparently wants to keep Wasserman and Sheinberg on his side, if only because of that connection. But Hollywood is also expecting the Bronfmans to introduce some new blood. Among the names being suggested as possible MCA executives: superstar agent Michael Ovitz, a Hollywood power broker whose father was a liquor salesman for Seagram and who is a longtime friend of Edgar Jr.; and Barry Diller, former head of Paramount Pictures and the Fox television network.
Finally, the Bronfmans will have to decide what to do with their stake in Time Warner. Edgar Jr. told analysts recently that, although he might eventually sell the holding, there was no urgency to do so. Time Warner has never seemed content with Seagram's investment. It enacted a poison-pill provision designed to prevent Seagram from raising its stake above 15 per cent, and it rebuffed Bronfman's efforts to obtain a seat on the board. Time Warner, which is often described as the best and most diversified entertainment company, has assets that include Warner Bros. film studios, HBO, Atlantic Records, Time magazine and cable-television companies. Unlike Time Warner, MCA mainly owns content producers, not cable or network television companies that carry the content.
But Bronfman is still interested in the distribution end of the business. When the MCA purchase was announced, he indicated that Seagram would be willing to make more cash available to MCA to permit future acquisitions in cable or network-television businesses. Before Bronfman's move, MCA had wanted to expand into television. Indeed, some of its biggest disagreements in its unhappy five-year relationship with Matshushita were over the Japanese company's refusal to provide financial support for acquisitions that MCA considered crucial to its development, including an intended purchase bid for NBC television network. When asked directly by analysts last week about his plans, Bronfman said that no deals were under way. But he added that both he and his father, who was born in Montreal, are American citizens. (Australian media baron Rupert Murdoch took out American citizenship to get around foreign ownership restrictions when he established the Fox television network in the mid-1980s.)
Seagram has the financial strength to back any acquisition intentions. It received about $11 billion from the sale of du Pont, then paid $8 billion for MCA. It put the remaining $3 billion towards Seagram's $8-billion debt. And it still has a $3-billion investment in Time Warner, which could be sold to raise cash.
Bronfman's move out of du Pont and into entertainment was initially greeted with skepticism by analysts and investors, especially those who held Seagram shares for the comparatively good dividends that they paid. Last year, Seagram's dividends amounted to 80 cents a share. Many investors who owned Seagram shares for their regular profits and dividends rather than long-term growth bailed out. But by the end of last week, other investors were expressing confidence in the Bronfmans' investment savvy and in the future of the entertainment business, and the value of Seagram shares had recovered about two dollars of its eight-dollar loss. Said Jacques Kavafian, an analyst with Lévesque Beaubien Geoffrion in Montreal: "The Bronfmans have proved to be very intelligent investors. Remember, that even if Edgar were star-struck, he's using $2 billion of his father's money and $2 billion of his uncle's money, and they're not going to let him get carried away." Edgar Sr. and Charles, company founder Sam Bronfman's sons, own 32 per cent of Seagram's shares.
Seagram's move is part of a trend that has seen several big investors dabbling in entertainment. Gerald Schwartz, president of Toronto-based Onex Corp., which made its fortune from leveraged buyouts in the 1980s, announced last fall that he is looking to buy an interest in a major movie studio. Onex already owns a small stake in Alliance Communications Corp., the Toronto-based entertainment company founded by Robert Lantos. "Movies," explains Schwartz, "are the locomotive that drive the entertainment business."
As an example, Schwartz notes, revenue from video games last year exceeded the box-office revenue from movies. But many of the video games were based on movies. "Think of the entertainment business as an inverted funnel," he says. "At the wide end is distribution, where all kinds of new technology is rapidly increasing the number and types of outlets. At the very other end is the movie business, which hasn't grown much at all. And yet it is the movie end that drives everything down the line." Schwartz says that the biggest potential for profit is at the narrow end.
Schwartz says that he and Michael Medavoy, a Hollywood veteran who produced The Silence of the Lambs and Amadeus, are in the market for a studio. Schwartz insists that he is interested in the profits, not the glamor, and has no interest in either managing the company or moving to California. "I never," he added, "want to read a script." Schwartz also has his eyes on beer maker John Labatt Ltd., of London, Ont.,whose assets, in addition to the Blue Jays baseball team and sports network tsn, include companies that do television productions and make commercials. But Labatt's entertainment assets are not as profitable as its core brewing business, and investors have been pressing the company to sell them. Although Schwartz said last week that Labatt is one of the companies he is thinking of buying, he declined comment on rumors that he would quickly sell off the brewing business and retain the entertainment sector.
Profits and movies are not always happy companions, although they do travel some surprising byways: the Royal Bank's Morrice cites 1992's surprise hit, the low-cost British movie The Crying Game, which cost about $5 million to produce and is expected to raise more than $75 million in revenue. But, for every single hit, there are many big duds. Alliance has found that one way to reduce risk is to presell a movie or television series to several international distributors, thus covering most of the cost of production. Canadian producers have been at the forefront of this style of production finance because of the comparatively low revenues from box-office and television deals in a small domestic market. Morrice says that other production companies around the world are also increasingly seeking to reduce risks and maximize profits by preselling their products.
Morrice, who was in France and Scotland last week at meetings of international film and television producers, is looking to expand the Royal Bank's entertainment lending to non-Canadian companies now. The bank also set up a merchant banking subsidiary last year to make equity investments in entertainment and computer software ventures.
Even conservative investors are moving into the entertainment business. Canada's growing list of publicly traded entertainment companies regularly get calls from institutional investors and pension-fund managers who want to learn more about the business. Bob Bertram, senior vice-president of investments for the Ontario Teachers' Pension Plan Board, says that his fund is making tentative forays into the industry, including an NHL team. "We have an investment in the Maple Leafs," says Bertram. "And what's sports if it's not entertainment?" And for newly minted mogul Edgar Bronfman, fresh from a week in Hollywood, what is business if it's not entertainment?
Maclean's April 24, 1995