Seagram drinks don’t fit in with movie script

Seagram has always targeted growth areas, built them up and sold them on. Hollywood is its new baby, so will its drinks be next to go? By David Benady

The proposed sale of its 800m Tropicana brand and its off-licence chain Oddbins, plus a “re-engineering” of its European operations have once again forced Seagram under the microscope (MW May 24 and April 12).

Coming less than 12 months after its purchase of an 80 per cent stake in the entertainment group MCA, it has raised speculation that the company is ready to pare down its beverage interests.

Last week’s results statement from the Canadian drinks to Hollywood films group only served to open up fresh speculation about the group’s future strategy.

Seagram chief executive Edgar Bronfman Jr told shareholders they were in for a bumpy ride, and said profits for the quarter were down 61 per cent to $23m (15m) compared with the previous year.

Last year was a watershed for Seagram – and one with at least a hint of corporate schizophrenia. It spent $6bn (3.9bn) on MCA, and also shelled out $240m (158m) to swallow up the fruit juice interests of Dole Foods.

The fruit juice business was squeezed into a new venture, called Tropicana Dole Beverages International, with its existing Tropicana orange juice range. But observers were left wondering just why Seagram was buying into the high-risk world of Hollywood. The fall in profits for the quarter is being blamed on the costs of integrating MCA into Seagram, stripping out costs and investing in new artists and films.

But the ride for Seagram could be bumpier than any of those at one of its MCA amusement parks.

Just what Bronfman Jr’s strategy is remains unclear. He is third generation Seagram – the company was set up by his grandfather Samuel Bronfman. His father, Edgar Snr, took care of the spirits side of the business through the Forties and Fifties, while Edgar’s brother Charles looked after the petro-chemicals interests.

But the claws came out for Bronfman Jr when he secured the MCA deal. Here was a star-struck rich kid attracted to the glamour of films. This may have been typical Hollywood bitchiness, but it was born out of a lack of understanding of just what Bronfman was up to.

One observer says the acquisition was in keeping with the Seagram tradition of buying into growth businesses, and selling them when they mature. Seagram started off in hotels, then sold out. During the Prohibition period, it took to selling liquor to bootleggers, then moved into petro-chemicals with the purchase of a slug of DuPont which it sold back to the company last year for $9bn (5.9bn), providing the finance to buy MCA and Dole’s fruit juice business.

According to this logic, Seagram has seen the growth potential of the entertainments industry, and is losing interest in its beverages business. It may be looking for a buyer for its new fruit juice business – so far only Tropicana has been mentioned – but the company still has to decide what to do with its spirits side, which remains profitable in a market where profit margins are falling.

When it bought Tropicana in 1988, it did not anticipate the rise in orange juice prices of the early Nineties. Tropicana was the archetypal Eighties brand with its method of pasteurising fresh orange juice and transporting it in specially refrigerated trains and tankers.

This proved a nightmare for Seagram, which had underestimated the sheer size of the stock control task. With the hike in prices, Tropicana’s margins quickly shrank. The purchase of Dole’s fruit juice interests last year was a tactical move, designed to give benefits of scale in the sales and distribution of the juices.

It has also been suggested that the purchase was made with half an eye on making the sale of Tropicana a more attractive prospect.

But Seagram’s move into the entertainments business has sparked calls from some shareholders for it to either sell its other activities, or set up a separate holding company for the entertainments interests. But not run both from the same centre.

The spirits business poses one of the larger questions for Seagram. If it sold its interests it would trigger a drawn out disposal programme. The most profitable brand is Chivas Regal which accounts for 50 per cent of Seagram’s spirits profits, worth about 500m annually.

The spirits world is in turmoil at present, and there are all manner of suggestions for the way it could progress. Guinness is under pressure in some quarters to hive off its United Distillers arm, and Allied Domecq is thought to be ripe for a break-up. Grand Metropolitan’s IDV is the only one which seems to be performing well.

Among all this uncertainty, Seagram could strike a deal for its spirits side, either putting it into a joint venture with UD or Allied’s demerged spirits division. Or it could become an agency operator, distributing other company’s brands as in the case of Absolut Vodka.

Bronfman Jr is going to need plenty of funds to pour into MCA, the film and entertainments business is notoriously risky. Seagram has already said it will sell its 15 per cent share of Time Warner to raise money and reduce its exposure to the entertainments world.

The Seagram of the future will be a strange collection of global businesses unless it starts selling off its beverages side. Then it will transform itself into a wholly different business, as it has done so many times before.

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