Junior’s school of thought

SBHD: Seagram’s purchase of an 80 per cent stake in MCA raised a few eyebrows, and a few doubts about the abilities of chief executive Edgar Bronfman Jr.

There is a temptation to believe that any multibillion- dollar deal in the entertainment industry is in some way mysteriously connected with the emergent multimedia industries – surely the Klondike of the late Nineties.

I say that without denying there is a multimedia goldrush and that some pan-handlers will make their fortunes. For others, there will be no shortage of fools’ gold. For them, the future presents more pan-handling.

Edgar Bronfman Jr is, by all accounts, no pan-handler. The chief executive of Canadian drinks combine Seagram is apparently a chip off the old block – his grandfather was a gritty opportunist who built a multimillion-dollar family empire by selling liquor to American bootleggers during Prohibition.

Edgar Jr’s father had an infatuation with the entertainment industry. Edgar Sr tried to gain control of Paramount and acquired a 15 per cent stake in MGM in the Sixties.

Bronfman Jr – let’s call him Junior – abandoned an early career as a movie producer to run Seagram’s European operations. One of his early initiatives was to shell out $700,000 (ú440,000) to become the sponsor and saviour of the Grand National at Aintree.

If all this sounds a bit flakey, let me remind you that movie mogul David Puttnam described Junior as “very bright” and “incredibly tenacious”.

But that’s the movie industry for you. Being praised by a fellow luvvie probably carries as much professional weight as being called unassailable by Margaret Thatcher or, for that matter, having John Major’s full support. You are entitled to ask how Junior stacks up as an industrialist, especially since he has just shelled out $5.7bn (ú3.6bn) – on behalf of Seagram – for an 80 per cent stake in MCA – maker of Schindler’s List and Jurassic Park.

Well, you could do worse than ask what Junior is not. He is not, it would appear, a master of corporate communications, for one thing. Throughout growing speculation about the deal, neither Seagram nor MCA-owner Matsushita Electrical Industrial contacted Hollywood elder statesman and MCA chairman Lew Wasserman about a transfer of ownership. Perhaps Junior considers Wasserman to be yesterday’s man.

Then Du Pont announced that it was buying back – for $8.8bn – the 24.1 per cent stake owned by Seagram, which said that the cash raised would, in part, finance acquisitions.

On Friday, Reuters reported that Junior had told analysts he had just bought MCA. Junior denied the story. By Sunday Seagram had confirmed it.

But hell, what do corporate communications matter to an international mogul of Junior’s standing? He is, after all, into entertainment, not communications. Far better, surely, to take a look at his diversification record.

There was the $850m that he peeled off for French cognac house Martell when there was something of a fashion for snapping up such independents. Then there’s the $1.2bn he paid for fruit juice concern Tropicana.

But these, of course, were not diversifications as such. What they were was a lot of money. The consensus is that he over-paid for the drinks interests in his acquisitions portfolio.

Then the habit appeared to transfer to non-drinks interests. Junior sunk a pile ($2.14bn, since you ask) into acquiring a 14.9 per cent stake in Time Warner, without winning the privilege of a board seat. This immediately invoked a poison-pill defence to prevent him increasing his interest.

No great triumph there. Seagram’s shareholders, family included, might wonder why Junior did not see the poison pill coming.

Undeterred, he is to have another go, this time with MCA – which controls Universal Pictures and ranks sixth in the Hollywood financial league. Word has it that Junior may be planning to use his MCA move to put pressure on Time Warner’s management to shape up or ship out, thereby providing an opportunity to flog his stake at a decent price. If true, it would suggest that Seagram is spending $5.7bn to get out of a $2.14bn mistake. Wow.

Say what you like about Junior, he likes the movies. Of course, being a member of the family that controls 36.4 per cent of Seagram provides the wherewithal to indulge a hobby or two.

The price paid for MCA values it at $7.1bn – 1.5 times last year’s revenues and 15 times last year’s cashflow. This, Junior tells us, is cheap. We shall see. There are six major Hollywood production players and again, as Junior tells us, a major studio has not been created for 50 years. I wonder why?

Perhaps the Japanese can tell us. Clearly, Japan’s love affair with Hollywood has cooled – while Junior’s passion has remained undimmed. Sony bought Columbia Pictures in 1989 and recently took a $2.7bn write-down on its interest. It has replaced the Tokyo management, sold the Canadian arm and hawked around Columbia’s cable and satellite division to raise cash. (Matsushita was similarly burned with MCA.)

The Japanese, usually in for the long term, had but a short love affair with Hollywood. Compatibilities that were meant to lead to heavenly vertical integration – with movie software distributed through Japanese technological hardware – are now perceived as the kind of Hollywood dreams that turn to dust. The history of Tinseltown demonstrates that there are more dreams of that kind than the sort that come true.

Meanwhile, the Japanese have hardware to develop for more tangible and realistic markets than entertainment, such as the multinational, business-to-business markets (and, it should be said, they also have the dollar’s plunge against the yen to worry about).

If the likes of Sony and Matsushita are showing that they may have become over-excited by the prospect of synergies between the movie industry and hardware developers, we should perhaps take note.

And, if the Japanese can’t make such perceived synergies work, one really does worry for the prospects of a young heir to a drinks conglomerate with stars in his eyes.

George Pitcher is joint managing director of media consultancy Luther Pendragon.