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Edgar Jr.'S Not So Excellent Ventures


Corporation: Strategies

EDGAR JR.'S NOT SO EXCELLENT VENTURES

Soon after taking over as CEO of Seagram Co. last June, Edgar Bronfman Jr. went to Toronto to meet with analysts. But if the 39-year-old scion of the Bronfman family expected a grace period, he got a grilling instead. The analysts peppered Bronfman with questions about his acquisition of a 14.9% stake in Time Warner Inc., the poorly performing media giant. Asked one pointedly: "Is it true you just wanted to have dinner with movie stars and you spent $2 billion to do it?" But the onetime Hollywood moviemaker brushed off critics: "I'm not going down in history as the one Bronfman who pissed away the family fortune."

Bronfman comes from a long line of people who take the family fortune seriously. The family still owns some 36.4% of Seagram's stock. But seven months after succeeding his father, Edgar Sr., as head of the Montreal-based conglomerate, Bronfman is still struggling to establish a name for himself. Although groomed for the top since joining Seagram over a decade ago, Bronfman--who spent his twenties writing pop songs and producing a series of forgettable movies--has never fully shed a reputation as a dilettante who owes his job more to nepotism than to business acumen.

Bronfman declined BUSINESS WEEK's request for an interview. But company executives and industry sources say the new CEO is determined to make his mark by spearheading an ambitious acquisitions program that is pushing the spirits giant well beyond its traditional liquor business. Faced with declining alcohol consumption, Bronfman is reshaping Seagram into a more broadly based beverage and media company. But so far, his moves have played to mixed reviews. "Edgar Jr. [wants] to make Seagram a full-line beverage company," says Tom Pirko, a consultant who runs Bevmark Inc. "But the seminal issue is where is the company going?"

Diversification isn't new for Seagram. In 1981, Bronfman's father acquired a 24.3% stake in DuPont Co. Ever since, the chemical giant has provided the froth in Seagram's earnings, while Seagram's liquor business has generated sluggish returns compared with global rivals. Analyst Irene Nattel of BZW Canada Ltd. expects Seagram's net profits before nonrecurring items for the year ending Jan. 31 to rise 35%, to $876 million, on a 4% increase in sales, to $6.3 billion. DuPont should account for 72% of those profits.

Bronfman has argued that Time Warner is a similar long-term investment that will allow Seagram to profit from growth in entertainment. But so far, with financing costs on the shares exceeding their dividends, Time Warner is hurting the bottom line. And since May, 1993, when Seagram announced the stake, Time Warner's stock has barely moved.

UPSCALE SHIFT. Many on Wall Street believe that Bronfman eventually wants to play a more active role at Time Warner. But while Seagram could profit from a turnaround at the media giant, the move has drawn sharp criticism from shareholders. "If I wanted to own Time Warner, I'd buy it myself," says Scott Penman, vice-president of equities at Investors Group Inc. in Winnipeg, Man., which owns 2.4 million shares of Seagram stock. Adds Bill Newbury, an analyst at College Retirement Equities, which owns 664,000 shares of Seagram: "This is Edgar Jr.'s first big venture, and I have to say that caution is warranted." Seagram's stock, which traded around 30 in May, 1993, trades in the same range today.

Bronfman's efforts to diversify in beverages have also brought mixed results. To lessen Seagram's dependence on alcohol, he bought the tiny maker of Soho Natural sodas, for $14 million in 1988. It was later sold for just $2 million. Next he bought juicemaker Tropicana from Beatrice Co. for $1.2 billion, and later in 1988, he paid $850 million for Martell Cognac to strengthen the portfolio of premium alcohols. In 1993, Bronfman acquired distribution rights for Sweden's Absolut vodka.

Industry sources say that in his zest to add brands, Bronfman overspent. He paid 28 times earnings for Martell and a huge premium for Tropicana: The $1.2 billion price tag was well over the $800 million Tropicana managers were offering for the company. "Seagram always pays a lot of money," says Pirko. "You should always try to sell something to Seagram."

So far, diversification has worked best on the spirits side, where the addition of the new brands has been accompanied by a restructuring of Seagram's traditional portfolio. Convinced that as consumers drink less, they will trade up to better brands, Bronfman has refocused Seagram on premium brands such as Chivas Regal and Glenlivet scotch, and sold off low-end labels such as Lord Calvert whiskey and Wolfschmidt vodka. "They were long since past their peak," says Edward F. McDonnell, president of Seagram's Spirits & Wine Group.

The upscale shift appears to be working. Improved Asian distribution is now fueling double-digit growth at Martell, while Absolut should grow around 6% this year, to roughly $300 million. The result: Liquor operating margins should top 15%, up from 12.6% in 1991.

By contrast, returns from Tropicana have so far been slim. Insiders say earnings--which have averaged well below $100 million annually--have never come close to Seagram's expectations. Turnover has been heavy: As Bronfman sought to boost returns, Tropicana went through three presidents and a half-dozen marketing chiefs in the first five years of ownership. And this revolving door has been costly. After Tropicana in 1988 introduced Twister, a fruit-based drink, sales of the hot brand hit $250 million in the first two years. But as management turmoil shook Tropicana, Twister lost momentum to New Age competitors such as Snapple Beverage Corp. Twister is now languishing in the booming segment.

Now, things may finally be looking up. In early 1993, Bronfman recruited Ellen R. Marram, a well-regarded marketer who was president of Nabisco Biscuit Co., to head Seagram's nonalcoholic beverage group. She has since intensified an aggressive global expansion and a series of new-product launches that show signs of squeezing better performance out of Tropicana. Tropicana has expanded into Canada, western Europe, and the Far East. In the U.S., it has introduced new juices such as Grovestand, an extra-pulpy version of Tropicana's premium orange juice. Altogether, Marram says, new products will bring 21% of Tropicana's estimated $1.4 billion sales this year. Still, the expansion is expensive. Analyst Nattel believes Tropicana's operating income will fall 14% for 1994, to $88 million.

HOOKED ON HOLLYWOOD. But with profits expected to strengthen over the next several years, Marram says analysts have been too quick to argue that Seagram overpaid for Tropicana. "You have to look into the future to answer that question," she says. Other buys are also imminent. A top-of-the-line tequila is a likely target, and observers think Tropicana must soon catch up in New Age drinks. "They're looking at beverages that can be marketed under the Tropicana name as an alternative to Coca-Cola Co.'s Fruitopia," says Joel Weiner, an ex-Seagram exec.

Bronfman is also trying to make his disparate empire function more efficiently. He recently hired Boston Consulting Group to help cut costs and focus Seagram's long-term strategy. Bronfman has given few signs of where the strategic review will lead. But if the guests at his recent wedding are any indication, he's still in love with Hollywood. Divorced in 1991, Bronfman recently married Clarissa Alcock, scion of a wealthy Venezuelan oil family. The singers Ashford & Simpson performed at the Caracas wedding, and Hollywood potentates Barry Diller, Michael Douglas, and Michael Ovitz were guests. Douglas delivered a toast to Edgar and Clarissa that described their relationship "as an example to us all." So far, the same can't be said for Bronfman's ambitious diversification strategy. By Laura Zinn in New York, with Julia Flynn in London


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