Merger Puts Seagram at Top of Music Charts

Seagram Co. today becomes the world’s music superpower as it completes its $10.4-billion purchase of PolyGram.

Though the company is instantly transformed into the leader in global market share, it is preparing deep cuts--some much deeper than expected at well-known labels--to reduce costs, raise margins and rest the company’s future on a leaner roster of acts most likely to generate profit.

The PolyGram acquisition makes the Canadian liquor firm the industry leader with a vast and potent international artist roster that includes such acts as rapper Jay-Z, Italian tenor Andrea Bocelli, gospel star Kirk Franklin, Irish singer Van Morrison and rock acts Beck, Largo and U2.

The combined entity, called Universal Music Group, leaps this week to first place in the U.S. music rankings, accounting for more than 60 of the albums on Billboard magazine’s top 200 chart and nearly a quarter of all records sold at domestic retail outlets last week. Seagram’s current music company is last among the six majors.

In many ways, the future of the company is now leaning heavily on the success of its music division. On Wednesday, Seagram issued a profit warning predicting that its Universal Pictures movie division would report a negative cash flow of $65 million for the quarter because of a recent string of box-office disappointments. Seagram said the division’s weak performance this year could result in a “modest loss” in cash flow for fiscal 1999.

Two recent films were particularly costly for Seagram. Combined, “Babe: Pig in the City” and “Meet Joe Black” could lose more than $100 million.

The closing of the music deal sets the stage for the biggest restructuring in the history of the record business, with cuts at some labels, including L.A.-based A&M; and Geffen, much deeper than expected. Seagram plans to slash $300 million in costs annually by integrating businesses, closing plants and warehouses and downsizing some of the nation’s best-known labels.

Sources estimate that nearly 20% of the 15,500 workers employed by PolyGram and Universal could lose their jobs as Seagram attempts to reshape itself. Hundreds of artists and record label employees will be issued pink slips over the course of the restructuring--which is expected to start in January and continue until June.

While it has not been determined exactly which jobs will be cut, both A&M; and Geffen are expected to slash their artist rosters by at least half and pare their staffs by two-thirds, sources said. Motown, Island and Mercury, which are based in New York, are also expected to make deep cuts in staff and rosters.

Internationally, the combined company is expected to rely heavily on the strengths of PolyGram, which has been the industry leader for a decade. The U.S. division will combine 10 labels into four major groups.

Analysts suggest that the massive restructuring will provide Universal with unparalleled economies of scale guaranteed to boost operating margins and position it for strong revenue growth over the next three years.

The U.S. music consolidation plan was drafted by Universal Music Group Chairman Doug Morris, Vice Chairman Bruce Hack and Chief Operating Officer Zach Horowitz and approved last month by Seagram chief Edgar Bronfman Jr. A sketch of the plan will be presented Monday to the analyst community in New York.

Each of the four U.S. units will be shaved to about 100 recording acts and 175 employees and be expected to generate an estimated volume of at least $200 million per year in album sales.

In L.A., MCA and a combination of Interscope, A&M; and Geffen will dominate the landscape.

The Geffen and A&M; labels will be joined with Interscope, which will be run by Interscope founders Jimmy Iovine and Ted Field and President Tom Whalley. Sources said Geffen executives Ed Rosenblatt, Bill Bennett and David Simone are expected to leave--as is A&M; Chairman Al Cafaro. A&M;’s John McClain is expected to play a key role in the new organization.

MCA Records Group will survive the restructuring unscathed and continue to be run by Jay Boberg. MCA Nashville, the top country music label in the business, will continue to be run by Bruce Hinton and Tony Brown.

In New York, Motown, Polydor--and possibly Def Jam Records--will be folded into Universal Records Group. The company will continue to be run by Chairman Mel Lewinter with assistance from Jean Riggins and Kedar Massenburg. Def Jam’s Lyor Cohen is likely to take on the presidency at Universal if Seagram can work out a deal to purchase the remainder of Def Jam. Russell Simmons, founder of Def Jam, would have a role in the organization if the sale goes through.

Island will be combined with Mercury to form Seagram’s other major outpost on the East Coast. PolyGram distribution chief Jim Caparro will take over the new company as chairman, with John Reid, chairman of PolyGram Canada, brought in as president. Island executives Hiriam Hicks and Johnny Barbis will take on new roles at the combined company, but Island President Davitt Sigerson and Mercury chief Danny Goldberg will leave.

PolyGram’s Luke Lewis will continue to run Mercury’s highly profitable Nashville division, which will remain operating as a stand-alone label--although back-room functions for the company will be combined with MCA’s Nashville operation.

The combined entity’s distribution system will be run by Universal’s Henry Droz and Jim Urie with the assistance of a number of top PolyGram distribution executives. In the U.S., the corporation will integrate sales forces and utilize a blend of manufacturing plants and warehouses from both organizations. About half of all U.S. plants and warehouses currently operated by PolyGram and Universal will be shut down or sold in the next year.

Outside the U.S., Seagram will fold its Universal sales force into PolyGram’s sales force and turn over all manufacturing and distribution duties to the PolyGram team in April when its current deal with BMG expires. Universal has had no manufacturing or distribution system outside the U.S.

Universal decided to shutter most of its own operating systems outside the U.S. and adopt PolyGram’s music publishing, auto-processing, financial and royalty systems as the backbone of its global operation. Universal will appoint PolyGram executives Jonathan Similansky and Jonathan Manley to head the company’s global human resources and information technology units.

Universal’s international division will be run by Jorgen Larsen, who has secured the services of most of PolyGram’s key global executives, including Norman Cheng in Asia, Kei Ishizaka in Japan, Wolf Gramatke and Tim Renner in Germany, Pascal Negre in France, John Kennedy in Britain, Manolo Diaz in Latin America, Marcello Castillo Branco in Brazil and Theo Roos in Holland.

Universal’s classical music unit, which will now account for nearly 40% of all classical recordings sold globally, will be run by PolyGram’s Chris Roberts. Verve Records, the company’s jazz division, will be run by Universal’s Tommy LiPuma and Ron Goldstein and supervised outside the U.S. by Roberts.

Universal’s musical publishing division will be run by David Renzer. PolyGram’s David Hockman and Nick Gatfield are expected to leave the company.