J'Adore Content

By John Greenwald

It is as if God placed upon the earth these tools--movie studios, television networks, telephone companies, record labels, cable companies, Internet providers--and then stood back and waited for silly mortals to figure out how they all fit together. Last week's talk of a $35 billion purchase of Canada's Seagram by France's Vivendi represents the latest human attempt to make some of these pieces click into a seamless, revenue-generating new-economy Tinkertoy. The toy boys in this deal, Vivendi CEO Jean-Marie Messier, 43, and Seagram CEO Edgar Bronfman Jr., 45, can't resist the urge to merge Vivendi's telephone company, Internet provider and cable system with Seagram's Universal Studios and Universal Music Group.

The idea here is similar to what compelled Viacom to buy CBS and AOL to merge with Time Warner: joining content with distribution. In some sense, it is technology--or fear of technological change--that is driving these partnerships. Who knows in the high-speed, always-on, wireless world what is more valuable: content or distribution, programming or cable, music or the means to get the tunes to the listener?

The real convergence in this deal would be the alliance of Universal's vast film and recorded music holdings with Vivendi's sprawling Internet, pay-TV and software-publishing properties. Classics from Universal's library of 24,000 TV episodes and more than 3,000 films, including such blockbusters as E.T. and Jurassic Park, could run on Vivendi's majority-controlled Canal Plus subscription-TV service, the Continent's largest. And Seagram's Universal music group, currently the biggest on earth, could deliver Limp Bizkit and Sting to millions of European households via Vivendi's 50%-controlled Vizzavi Internet portal. Such synergies will be enshrined forever--or at least until the next deal--in the proposed name of the merged colossus: Vivendi Universal.

The head of this new media power, Vivendi's Messier, is a former civil servant who has undergone a new-economy makeover. When he took over the firm four years ago, it was primarily a water-and-waste management operator--who needs that kind of boring stuff in the new economy? Since then, he has been reconfiguring the company through a flurry of mergers and asset sales, shifting the product flow from water pipes to fat data pipes. After this deal goes through, he will probably spin off the remaining hydro assets to concentrate on whether or not he should green-light Erin Brockovich Deux or make Enrique Iglesias available in MPtrois format.

The merged Seagram, based in Montreal, would also shed some assets, bidding adieu to its wine and liquor empire, which features brands like Captain Morgan rum and Chivas Regal Scotch and could fetch anywhere from $5 billion to $10 billion. Bottled spirits are much too ancien regime--and besides, you can't download rum. The likely buyer: Britain's Allied Domecq.

News of the talks follows hard on the heels of the mother of all such connections, the proposed $113 billion marriage of America Online and Time Warner, whose holdings include this magazine. And as in a Vivendi-Seagram deal, these hookups increasingly reach across borders. Last month Spain's Terra Networks, an Internet provider, agreed to pay $12.5 billion for the U.S. portal Lycos; the German media giant Bertelsmann will also be a partner.

In the U.S., where Federal Trade Commission Chairman Robert Pitofsky calls the wave of mergers "unprecedented," regulators are scrutinizing matchups like AOL-Time Warner for indications that the partners might use their clout to deny rivals access to their networks. In part to fend off regulators, AOL last week filed plans to open its wildly popular instant-messaging system to other Internet providers. A Vivendi-Seagram deal would probably face less U.S. scrutiny, since most of its distribution channels would be in Europe. European regulators, however, will take a hard look, just as they said they would do last week with Time Warner's proposed buy of Britain's EMI music group. Says Marion Boucher Soper, who follows media mergers for Bear, Stearns: "[Regulators] are going to put AOL-Time Warner through every hoop they can."

Combining Vivendi (1999 revenues: $41.8 billion) and Seagram ($12.3 billion) would bring a fat payoff for Edgar Bronfman Jr. and the entire Bronfman family, which owns nearly 25% of Seagram. Bronfman has had to endure endless Hollywood brickbats since his father tapped him for the top job in 1994. Outsiders ridiculed the Bronfman scion, who writes pop songs under the pseudonym Junior Miles, as a star-struck dilettante when he jettisoned Seagram's lucrative 24.2% stake in DuPont and used the proceeds to buy Universal. It didn't help that DuPont stock promptly doubled, as Seagram's own shares sparkled less than flat Champagne. Yet Bronfman stubbornly stuck to his show-biz guns. He shelled out $10.4 billion for Polygram music in 1998, making his family's 76-year-old liquor business look like a sidelight. Bronfman has since been shopping his empire to the usual mogul suspects: Viacom CEO Sumner Redstone and News Corp. founder Rupert Murdoch, among others.

Sensing an opportunity, Messier approached Bronfman last October. Seagram possessed the kind of content-producing assets that Messier's distribution channels thirsted for. Talks between the two men heated up in January following word of the AOL-Time Warner deal. But the discussions nearly collapsed last spring, before both companies settled on a stock swap that would value Seagram at about $75 a share--a roughly $25 premium above its recent price.

Bagging Seagram would anoint Messier as a media mogul alongside the Murdochs and Redstones of the world. As Messier recently told TIME, "Fusing content and media [distribution] has been Vivendi's strategy since Day One." He says the merged entity will become "a totally integrated group with full control over its operations."

Operationally, Messier will have his hands full. Universal lost $206 million in the past fiscal year. Erin Brockovich's boffo box office (expected U.S. gross: $125 million) could help, particularly if Julia Roberts wins an Oscar for Best Actress. But studio chief Ron Meyer will doubtless be sent packing by Vivendi, which reportedly plans to replace him with Pierre Lescure, chairman and CEO of Canal Plus. Messier must also decide what to do with Seagram's 45% stake in Barry Diller's USA Network, which has cable channels and film- and TV-production facilities. Diller has feuded with Bronfman since the Seagram heir scotched Diller's 1998 run at NBC.

How all these egos fit together could prove at least as vital as any new media-old media synergies that a merger may bring. Content may love distribution, and new media may love old, but that doesn't necessarily mean Jean-Marie will love Edgar Jr.

--Reported by Ann Blackman/Washington, Jess Cagle and Eric Roston/New York, Bruce Crumley/Paris and Steven Frank/Toronto

With reporting by Ann Blackman/Washington, Jess Cagle and Eric Roston/New York, Bruce Crumley/Paris and Steven Frank/Toronto