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WALL STREET, CALIFORNIA | Stock Exchange / James Peltz
and Michael Hiltzik

Seagram, Kaufman & Broad: Something to Build On?

April 13, 1999|JAMES PELTZ and MICHAEL HILTZIK

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Before We Start ... . .

Jim: It's an honor to have you as my partner on these pages any day, Mike, but especially so today because of the Pulitzer Prize awarded to you and our colleague Chuck Philips. Congratulations, pal!

Mike: Thanks, Jim. It's been a privilege to work with Chuck, and of course with you, too.

Seagram (VO)

Jim: Maybe this company should rename itself, Mike, given all its changes.

Mike: As long as it doesn't change its elegant ticker symbol, which memorializes one of its most famous products, Seagram's VO whiskey.

Jim: Seagram remains a global distiller of spirits and wines, including Chivas Regal, Absolut Vodka and others. But its CEO, Edgar Bronfman Jr., has been remaking it into an entertainment giant.

Mike: That's right. This all started a few years ago when young Edgar persuaded his father and other relatives who ran the place to dump Seagram's 24% stake in DuPont Co.

Jim: Seagram sold that stock in 1995 for nearly $9 billion, giving Edgar Jr. the money to buy entertainment properties.

Mike: Some people think he should have stayed put: That much DuPont stock today is worth $16 billion. But that's hindsight. The big question now is Bronfman's ability to manage the entertainment assets he acquired by buying MCA Inc. from Japan's Matsushita Corp. in 1995 for $5.7 billion.

Jim: Why don't you tick them off?

Mike: First there's Universal, whose movie studio has by any measure fallen on hard times.

Jim: You mean it's had a string of flops.

Mike: Now, I'm trying to be charitable. It also owns, of course, the Universal City theme parks here and in Florida, and it recently bought PolyGram Records.

Jim: For the mind-boggling sum of $10 billion, part of which it financed by selling the Tropicana orange-juice business to PepsiCo for $3 billion.

Mike: Right. Incidentally, Seagram is a Canadian company, but all the figures we're using are in U.S. dollars.

Jim: And there's been one other Bronfman move. In a complex deal last year, Seagram spun off its Universal TV assets, such as cable-TV channels, to media mogul Barry Diller but retained 45% interest in the resulting Diller company, now called USA Networks Inc.

Mike: One way to interpret that deal was to think of Edgar Jr. buying Barry Diller as his TV executive, because he gets Diller's unquestioned skills at running entertainment properties.

Jim: OK. But after we add all of this up, where are we with Seagram?

Mike: This is a sensitive subject in Hollywood, but it's hard to find a top entertainment executive who is as disrespected as Edgar Bronfman Jr.

Jim: That's not easy to do.

Mike: Let's just say that studio chiefs around Hollywood simply don't think Edgar Jr. is in their league.

Jim: He's been called a Hollywood dilettante.

Mike: And there's no question that Universal Studios has had its troubles. Last year was a disastrous one for this studio, and its market share dropped to the 4%-5% range. Its flops included "Babe: Pig in the City," the sequel to the original "Babe," which was a huge moneymaker. But the second "Babe" just did not fly, in part because, according to Hollywood wisdom, it was mistakenly marketed as a children's picture, which it isn't.

Jim: Hmm, a pig that couldn't fly. All of this was why Universal Studios Chairman Frank Biondi and film chairman Casey Silver got kicked out last fall. Meantime, Seagram's booze business has been weak in Asia. So, Seagram's stock had struggled; it's gained about 69% since early '96 while the Standard & Poor's 500 index has more than doubled.

Mike: But the stock has risen sharply since last fall.

Jim: True. The betting is that Seagram's Asia business is improving. There's optimism that Seagram will thrive in recorded music with PolyGram. Seagram has a new theme park opening in Orlando, called Islands of Adventure. So the stock, which dropped below $30 last October, now trades in the low 60s.

Mike: It seems the Wall Street establishment has suddenly gotten religion about Seagram.

Jim: Not me. I'm still with the unwashed.

Mike: Really? I'd buy the stock.

Jim: I'm surprised, but the floor is yours.

Mike: Think of it this way: PolyGram is expected to be an even bigger force in music for at least the next couple of years. Also, Universal's theme-park business will probably get a bump from all the publicity and excitement surrounding Islands of Adventure.

Jim: It better. Seagram's got a ton of start-up costs to pay off.

Mike: Moreover, Bronfman makes a convincing case that Seagram now relies less on the volatile motion picture business, which is now a poor relation in this company. So in the end, I'd say this stock has a ways to go.

Jim: Not me. First, let me say that I don't think any movie executive should be putting down Edgar Jr., given how often they're shown the door because their product flops. Still, Edgar Jr. has made an enormously expensive gamble that has yet to pay off.

Mike: It will take time.

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