Deal Time At Seagram
For months now, Edgar M. Bronfman Jr. has been prefacing his speeches with a faux apology that goes something like this: Sorry, but today I will not be announcing our much-rumored combination with Disney, CBS Viacom, News Corp., Sony, Bertelsmann, Yahoo!, Vivendi, AT&T Bronfman, president and chief executive of Seagram Co., usually goes on to name every big-time media and entertainment company in the world. Bronfman's absurdly inclusive list invariably prompts laughter, but it tends to fade fast as onlookers search in vain for a trace of merriment in his deadpan expression.
Yes, he is joking, but at his own expense. Sources say Bronfman has had preliminary merger talks with quite a number of companies on his list but made little headway until April. That's when Bronfman entered into serious negotiations with the interrelated pair of companies that have showed the most interest in a deal from the beginning: Paris-based Vivendi and Canal+. If all goes well--and the only obstacles remaining are purely technical--Seagram and the two French companies could announce their combination as soon as late June.
Bronfman believes the transaction is best characterized as a merger of near equals. How near is the question. Vivendi boss Jean-Marie Messier, 43, would be chairman and CEO and Bronfman, 45, would be the new company's second-ranking executive, with the title of vice-chairman. In theory, Bronfman would have authority over a large portfolio of operating businesses that is likely to include Seagram's main subsidiary, Universal Music Group. Seagram would occupy 5 of 18 board seats, and the Bronfman family would control an estimated 8% of the shares of the combined company, making it the largest shareholder by a factor of two or three.
This is clout, certainly, but not dominance, especially given Messier's reputation as a strong-willed executive who is unlikely to cede authority easily. "We think of it as a partnership, but Messier will be the ultimate leader," says Bronfman in an exclusive interview with Business Week. "He's extremely smart and tough, a dealmaker who knows how to get things done. That's extremely important to me because this is just Stage One. There will be opportunities going forward for us to do many more things."
Vivendi Universal, as the combined entity is to be called, would vault into the top rank of media and entertainment companies, with projected revenues of $65 billion for 2001 and a market capitalization of $100 billion. On paper, anyway, the entertainment operations of the three companies are remarkably complementary, with Seagram bringing music, movies, and theme parks, Canal+ adding television, and Vivendi contributing Internet and telecommunications services. Vivendi is roughly three times Seagram's size, but the critical difference between the two is that Vivendi is management-dominated, and Seagram is still a family company writ large.
For Edgar Bronfman Jr., union with Vivendi and Canal+ would mark the end of a tumultuous, decade-long drive to transform the liquor company founded in Canada by his grandfather into a world-class media and entertainment company. Edgar Jr. got off to a shaky start but has brought granddad's company a long way, mainly on the strength of two blockbuster deals: the 1995 acquisition of MCA (owner of Universal Studios) for $5.7 billion and the 1998 purchase of Polygram for $10.4 billion.
Fully 65% of Seagram's revenues now come from entertainment. Acquisition-related debt and restructuring charges continue to depress the company's net income: Over the past 12 months, Seagram earned just $115 million on revenues of $15.5 billion. But for the first time, every one of the company's major units--wine and spirits included--is riding the momentum of growing market share and improving financials. Even Universal Pictures, Seagram's chronically troubled Hollywood studio, is on a box-office roll led by Erin Brockovich, U-571, and Gladiator.
Over the past year and a half, Seagram's stock has sprung spasmodically to life, soaring from a low of 26 to a high of 64 1/2 in March. The shares were trading in the low 50s before Seagram acknowledged on June 14 that it was in talks with Vivendi. Vivendi has agreed to acquire Seagram for at least $75 a share. Thus, Seagram would bow out as an independent company valued at $40 billion, compared with $15 billion when Bronfman took over.
"Seagram's transformation has worked extremely well if you understand that what they've done is taken a holding company with very mature businesses and swapped that portfolio into a series of businesses that are well-positioned to capitalize on the convergence of entertainment and technology," says Christopher P. Dixon, PaineWebber Inc.'s media analyst. "The one negative I see is that missed opportunities have led to questions about Seagram's scale."
For all of his remodeling work, Seagram--like Canal+ or Vivendi--is a second-tier player in a brutally competitive industry where size matters increasingly. The impending merger of Time Warner Inc. and America Online Inc. will create an omnimedia colossus with some $38 billion in revenues, vs. Seagram's $16 billion. "I'm a great believer that we are going to a world of vertically integrated companies where only the big survive," says Gordon Crawford, senior vice-president of Capital Research & Management Co., an influential shareholder of Seagram and many other entertainment companies.
And we are going there in a hurry. The pace of consolidation has accelerated over the past few years, giving rise to four superpowers: Time Warner, CBS Viacom, Walt Disney, and News Corp. A Vivendi-Canal+-Seagram combination would enlarge the industry's elite grouping into a Big Five. It remains possible for other enterprising second-tier players to fashion a combination that would add a sixth contender, but time is short. The industry consensus is that almost all of the remaining choice assets will be snapped up and folded into one mega-combine or another over the next year or two.
In Bronfman's view, Seagram was at a disadvantage not only because of its size but because of its strategic imbalance, being heavily weighted toward content (particularly music) and away from distribution (particularly television). Last December, a few weeks before the AOL-Time Warner deal was announced, Bronfman told family members that the time had come to reconsider Seagram's independent status. In early 2000, Seagram privately put out word that it was willing to sell while publicly denying any desire to do so.
With Seagram's demise as an independent company looming, Bronfman admits to mixed emotions. The entire Bronfman family has a deep attachment to Seagram and to its flagship liquor business in particular. "It's in our blood. It's where we came from," says Samuel Bronfman II, Edgar Jr.'s eldest brother, who runs Seagram's wine business out of San Mateo, Calif. But for Edgar Jr., the lucrative sale to Vivendi also holds the promise of personal redemption.
For much of the past decade, the question of Seagram's destiny was subsumed in doubts about Edgar Jr.'s character and abilities. The suspicions that attach themselves to anyone whose essential qualification for high position was established at birth were exacerbated in his case by his youthful dabblings as a film producer and songwriter. Business school? Bronfman never even went to college. Nor did it strengthen his corporate bonafides that he took the helm of Seagram looking like he had stepped out of a Giorgio Armani ad: 6-foot-3, imperially slim, scruffily handsome. On Wall Street and in Hollywood, he was mocked as a rich kid indulging an adolescent fascination with show biz.
A series of early management blunders at MCA, which was renamed Universal Studios, only strengthened the widespread suspicion that Edgar Jr. was ill-equipped to lead. Seagram's move into entertainment has generally traced a curious pattern of thrust and retreat, of opportunities decisively grasped and others puzzlingly relinquished. This pattern was vividly illustrated by two overlapping transactions in 1997-1998: the acquisition of Polygram, which was merged into Universal Music Group to create the world's largest record company, and the sale of most of Universal's U.S. television assets for $4.1 billion.
The buyer of the TV properties was Barry Diller, who has a golden reputation both as an operator and an acquirer of media businesses. Seagram came away with $1.2 billion in cash and a 45% interest in USA Networks Inc., which Diller formed by merging Universal's properties into his Home Shopping Network. In essence, Bronfman wagered that Diller, whom he has known for 26 years, could make better use of Seagram's TV properties than he could. Diller has delivered: The value of Seagram's stake in USA Networks has tripled, to $10 billion.
Under the complicated agreement he struck with Diller, Bronfman can boost Seagram's stake in USA Networks to 50.1% in two years. But even that would not give Seagram--or its possible successor, Vivendi Universal--operating control of the company. Diller, 58, has the right to vote all of Seagram's shares for as long as he chooses to remain CEO. If he were to leave, Bronfman would likely obtain control. But in the meantime, Seagram's contribution of assets to USA Networks diminishes it as an operating company. In effect, Edgar Jr. swapped some basic building blocks of empire for a passive investment.
Diller would not have entered into his pact with Edgar Jr. had he not expected to have his backing in using USA Networks to make big acquisitions. However, his agreement with Bronfman gives Seagram the right to veto any deal worth 10% or more of USA's market cap. Diller has pulled off a series of modest acquisitions in the e-commerce field, but Edgar Jr. has withheld the support Diller was banking on. In 1998, he squelched Diller's attempts to interest General Electric Co. in selling NBC. "There was a deal structure that Barry felt would work and I didn't," says Bronfman, who refuses to provide more detail. Diller would not comment.
Bronfman's reluctance to make a play for NBC infuriated Diller, whose anger has never been slow to fade, and it also disappointed Wall Street. "Anyone with that big a piece of Barry should make use of it," says a top media industry dealmaker. "Edgar has done well overall, but he has missed some terrific opportunities in not backing Barry."
No self-styled media mogul--think Rupert Murdoch or Sumner Redstone--would ever have done the deal Bronfman did with Diller, driven as they are by their own sort of Cartesian logic: I conquer, therefore I am. That Edgar Bronfman Jr. is a far more temperate personality is only to be expected. As a third-generation heir to one of North America's great family fortunes, his ambition never took the form of conjuring world-beating schemes out of thin air. How could it have? Bronfman grew up in the shadow of what his predecessors had created and came to define himself in relation to their corporate legacy, first by resisting and then by embracing it.
"Family adds an element of extra tension to a company," says Jonathan M. Tisch, president and CEO of Loews Hotels and a scion of a billionaire family himself. "You really need to understand each family members' strengths and weaknesses." In Edgar Bronfman Jr.'s case, there was much he not only needed to understand but to transcend, for the Bronfmans have carried a heavy load of dynastic dysfunction down through the generations.
Founder Samuel Bronfman (1891-1971) was both a brilliantly intuitive businessman and a hot-tempered tyrant who bullied his brothers into submission--or out of Seagram--and enflamed the question of succession by pitting his own two sons, Edgar and Charles, against each other. "[Father] would tell each of us disparaging things about the other," Edgar wrote in Good Spirits, one of his two autobiographies. "In truth, Sam Bronfman wanted a clone. This fact goes a long way toward explaining why my childhood was more of an endurance contest than a time of nurture."
Edgar and Charles never worked anywhere but Seagram. "I started with Seagram the day I was born," says Edgar, who so thoroughly dominated his cautious brother during their long, exasperating apprenticeship to "Mr. Sam" that he simply assumed Charles never aspired to running Seagram. While Charles remained close to the family seat in Montreal, Edgar Sr. moved to New York City, married into Wall Street's "Our Crowd" Jewish aristocracy, and became an American citizen. He and his wife, the former Ann Loeb, had three children: Sam II, Edgar Jr., and Holly.
Like Mr. Sam, Edgar Sr. was a devoted CEO but no model father. At age 11 or 12, Edgar Jr. made a trip alone across New England in the Seagram corporate jet to look at prep schools. "Are you here with your father?" one headmaster asked. "No," the boy replied coolly. "I'm here with my pilot." Edgar Jr. was 17 when his parents separated and began an acrimonious divorce. Edgar Jr. took it hard, and his unhappiness probably accentuated a certain willfulness in him. "I don't ever remember consciously trying to rebel," he says now. "It's not like I went off somewhere in India to chant. I just never liked school."
In the late 1960s, Edgar Sr. began investing on the side in movies and plays. Edgar Jr. liked to sift through the piles of scripts left around the family's Park Ave. apartment. At 15, he picked out a comedy about rebellious teens entitled Melody and persuaded his father to put up $450,000 to produce the film. During his summer vacation, Edgar Jr. moved to London to work for the film's producer, David Puttnam, who later made Chariots of Fire. During his junior year of prep school, Edgar Jr. took a couple of months off to complete The Blockhouse, a grim World War II film he co-produced with Puttnam. As a senior, he wrote a script and parlayed it into a partnership with Broadway producer Bruce Stark to develop movies and plays.
To his father's dismay, Edgar Jr. passed up college to become a full-fledged film and theater producer. He also began writing lyrics, working mainly with a recent Juilliard School graduate named Bruce Roberts, whom he met through a music publisher. They continue to collaborate to this day and have some 40 songs to their credit. The Edgar Bronfman Jr. songbook is weighted to yearningly romantic ballads with titles such as The Quiet Sound of You and I, In Your Arms, and To Love You More (a hit for Celine Dion). "With Edgar, it's not always a love song," says Roberts, "but it is always about personal feelings."
In 1979, at age 23, Edgar Jr. seemed to be living out one of his lyrics when he eloped with Sherry Brewer, a black actress he had met through singer Dionne Warwick, who had recorded his and Roberts' Whisper in the Dark. By his own account, Edgar Sr. warned his son that his and Sherry's children "would have problems being accepted by either black or white society." The two Edgars did not speak for a year and did not reconcile until 1982, when Senior shocked Junior with the question: "Will you join the company with a view to eventually running it?" After much soul-searching, Edgar gave up his rather lackluster film-producing career (the highlight of which was the Jack Nicholson film The Border) and took a job as special assistant to the president of Seagram.
Edgar Jr. had told his father than he would not join Seagram if his brother Sam objected. Sam, who had survived a harrowing and highly publicized kidnapping in 1975, had preceded his younger brother into Seagram with every hope of following in his father's footsteps. But in Edgar Sr.'s view, Sam was basically too nice to run Seagram. In his book, Edgar Sr. recounts a tennis match he and Sam played against a married couple: "The man had a slight disability, making it hard for him to shift positions easily. Noticing this, I said to Sam: `You can afford to poach at net.' He reprimanded me with his eyes and said: `Oh, Dad.' If [Edgar Jr.] had been playing, he would have noticed immediately and moved nearer the center of the court."
By the time Edgar Jr. was promoted to president and chief operating officer in 1989, his marriage was coming apart. He and Sherry were amicably divorced two years later and share custody of a son and two daughters. In early 1994, a few months before he replaced his father as CEO, Edgar Jr. married Clarissa Alcock, an executive from a prominent Venezuelan business family. He and Clarissa have three children, including twin girls.
BIG SHIFT. Even before his promotion to CEO, Edgar Jr. had begun urging a strategic shift toward entertainment. Seagram's decisive break with its past came not with the 1995 purchase of MCA but with the $8.8 billion transaction that preceded it: the sale of Seagram's 24.2% interest in DuPont. The purchase of the DuPont stake in 1981 was the definitive achievement of Edgar Sr.'s long tenure as CEO. But he agreed with his son that DuPont had become "a boring investment" that was unlikely to outperform the market. But boring was beautiful to Charles, who, in Edgar Sr.'s analysis, "reasoned that DuPont would be there forever, relieving us of the need to worry about good managers or bad managers at Seagram."
Edgar Jr. cleverly structured the DuPont transaction to save Seagram's shareholders $1.5 billion in taxes (the IRS promptly changed its rules), but its timing backfired horribly. Had Seagram maintained the investment for one more year, its stake would have been worth an additional $9 billion.
That was mortifying to the entire Bronfman family, but the abrupt shift in strategic emphasis saved Seagram from a worse fate than foregone capital gains. As the liquor business stagnated in the slow-growth markets of the 1980s, dividends from DuPont had become Seagram's sustaining source of income. Instead of accepting the company's creeping transformation into an investment fund in corporate drag, Edgar Jr. fulfilled the dynastic purpose of youth by taking the riskier and potentially far more rewarding course of trying to reinvent Seagram as an operating company.
Edgar Jr.'s key strategic insight--that entertainment content would be an increasingly valuable commodity--may not have been original, but it has proven correct. MCA is a case in point: By some estimates, its assets have tripled in value since the acquisition, easily outpacing DuPont stock.
Seagram's alternately aggressive and passive style of empire-building is in part a reflection of Edgar Jr's personality. Despite his glamour-boy looks, he is soft-spoken, studious, and methodical to a fault. "It's not unusual for me to talk to Edgar 10 times a day," says Seagram CFO Brian Q. Mulligan. "He gets all the information and really puzzles it through."
"ROYALTY." But it is also true that in contrast to the likes of Murdoch and Redstone, Edgar Jr. has never been allowed be his own man. Yes, Bronfman is unequivocally Seagram's president and chief executive officer, but he freely acknowledges that the big decisions have never been his alone, nor even principally. "Three people have to be in concert before Seagram makes any major move," says Bronfman. "Two are named Edgar and one is named Charles."
Edgar Sr., 70, remains chairman of the company. Charles, 68, is co-chairman. Between them, the elder Bronfmans still control almost all of the family's stockholding in Seagram through a labyrinth of trusts and foundations. Seagram's ruling triumvirate makes decisions behind doors closed so tightly that often not even Seagram's most senior executives understand what transpired. "As a group, the Bronfmans think of themselves as royalty," says a former top executive of the company. "As an employee, you feel like household staff. They give orders and don't expect to be talked back to." Edgar Sr. and Charles both declined Business Week's requests for interviews.
Despite the power he wields, Charles has not been actively involved in Seagram for years. Both Charles and Edgar Sr., the longtime chairman of the World Jewish Congress, rank among the world's preeminent Jewish philanthropists. But Edgar Sr. still finds time to visit his office at Seagram's Park Ave. headquarters almost every day. "The dynamic Dad has created is one where he does not impose his view, which makes me seek it," Edgar Jr. says. "I don't consult him on daily operations regularly, but on any major strategic initiative, he's involved from the outset."
The strong-willed Edgar Sr. has dominated his cautious, retiring brother ever since they were boys. In essence, Edgar Sr. cajoled and browbeat Charles into acquiescing to the entertainment makeover led by Edgar Jr. "The only reason I finally said yes was one, I wanted the family unified, and two, I knew we weren't endangering the security of Seagram's core business," Charles said in a rare interview in mid-1999 with The Jerusalem Post. "Even if things don't go well, we're not imperiling the fundamental value of Seagram because you can always sell these entertainment companies."
Just a few months later, in November, 1999, Edgar Jr. welcomed Charles's son Stephen onto the Seagram board at the company's annual meeting in Montreal, the Bronfman's ancestral seat. A misty-eyed Charles stood up before the shareholder throng and praised Edgar Jr. for his "courageous and professional" leadership of Seagram. "You're doing a hell of a job," he said, shaking his surprised nephew's hand. Said Edgar Jr.: "Charles's willingness to be so outwardly supportive sends a strong signal that the family is united behind the strategic direction of the company."
Or did it? In 1999, Charles sold 15.5 million of the 56 million shares of Seagram under his control, reducing his stake to 9.5% from 15.7% when Junior was named CEO. He has reinvested much of the proceeds in Claridge SRB Investments, a privately held Montreal holding company he runs with Stephen. In 1997, Claridge acquired a controlling 20% interest in Koor Industries, Israel's largest industrial conglomerate. By all appearances, Claridge has prospered greatly. In fact, certain circles of moneyed society in Montreal, Jerusalem, and New York are rife with speculation that Charles has become the richest Bronfman, eclipsing Edgar Sr.
HARD PLACE. Was Charles's selling of shares a vote of no confidence in Edgar Jr.'s leadership? Not necessarily. In any event, the real issue was not the motive underlying Charles's disinvestment but its impact on Seagram and its strategic position. In Edgar Jr.'s view, the company needed to add scale to remain competitive. But getting Uncle Charles to sign off on another big entertainment acquisition was unlikely now that he and his son had their own corporate empire to build. And if Charles were to continue to unload stock, at some point the Bronfmans' ability to maintain control of Seagram would be threatened. The best solution for all concerned was for Edgar Jr. to try to sell Seagram on its own terms rather than run the risk of being dictated to by a raider.
When he first became CEO, Edgar Jr. hung on the wall of his office a photograph of his grandfather peering up quizzically from a game of solitaire. He captioned the photo with a challenge of sorts that Mr. Sam had issued when his eventual successor was still in grade school: "Shirtsleeves to shirtsleeves in three generations. I'm worried about the third generation." Edgar Jr. made a point of studying his grandfather's portrait first thing every morning. "I'm not going down in history as the one Bronfman who pissed away the family fortune," he said a few years ago.
About two years ago, the photo was removed and packed off to a warehouse. As Bronfman tells it, the photo's disappearance had nothing to do with granddad and everything to do with a remodeling directed by his wife. "It's about me being a husband who does what he's told," he says with a smile. But with the sale of Seagram to Vivendi, Edgar Bronfman Jr., may exorcise his grandfather's ghost at last.