Seagram Rebuilds Investor Confidence With Universal Success

ORLANDO, Fla. -- I stumble off the Dueling Dragons roller coaster at the new Universal Studios' Islands of Adventure, my legs wobbly after the dizzying two-minute ride, my eyes watering in the bright Florida glare. I blink woozily and reach into my pocket for my shades, a cheap pair I picked up a day earlier to save myself from the subtropical sun.

They're broken, split neatly in half by the ride's almost malicious intensity.

And I know I'm not in Disney World anymore.

Universal's Islands of Adventure

Islands of Adventure, Universal's $1 billion bid to win tourists from Disney World.

Source: Universal Studios.

Welcome to Islands of Adventure, a $1 billion expansion of Universal's Florida theme park that will make Universal a real competitor to Disney (DIS) for the first time when the expansion opens in May.

Islands of Adventure is only part of the master plan for Universal Studios Escape, as Canada's Seagram (VO) and Britain's Rank Group grandly call their 840-acre joint venture. Escape also includes CityWalk, a nighttime entertainment area with a dozen clubs and restaurants and a 2,000-seat concert hall. It will eventually have five hotels with 5,000 rooms, to be operated by Loews (LTR).

The hype surrounding Islands of Adventure has already helped push Seagram's stock to an all-time high, and a tour of the park suggests that the optimism may be justified. While Islands' impact on Seagram's bottom line will be relatively minor even if the park is a huge hit, a successful launch of the park would be an important confidence-builder for Seagram shareholders, who are hoping the company has turned the corner in its struggle to transform itself into an entertainment conglomerate amid losses at its movie studio and a slowdown in its core liquor business. Islands might even prove that Seagram Chief Executive Edgar Bronfman Jr., who has been accused of preferring Hollywood glamour to boring bottom-line profits, ain't as dumb as he looks.

---

Universal doesn't have the space to give its visitors the resort-like atmosphere that greets customers at Disney World, where the parks are buried inside thousands of acres of company-owned land, free of the motels and fast-food joints that sit not far from Universal's gates. Wisely, Universal recognized that in designing Islands of Adventure. Instead of trying to build a miniature Disney, it created a more energetic, compact park that has some of the best thrill rides anywhere. Universal is especially proud of its $100 million Spider-Man 3-D motion ride, which the company claims is the most technically advanced ride ever built.

Spider-Man delivers "something close to that long-forsaken dream: truly compelling virtual reality. The vertigo seems terrifyingly real. And as gravity takes hold, you might just let out a literal scream," Wired wrote in its May issue. After taking a spin on Spidey, I'd have to agree.

In addition to Spider-Man, Islands of Adventure has not one, but two roller coasters that blow away anything available at Disney World, as well as a Jurassic Park water ride with a steep 85-foot drop. (Disney is trying to counter with a new indoor roller coaster set to open late this summer. But Disney has nothing remotely comparable to Spider-Man, and given the amount of work Universal put into the ride, it would take Disney at least two years to build something similar. Disney wouldn't comment on the rival park.)

	The Incredible Hulk
	The Incredible Hulk Coaster, which takes riders from 0 to 40 mph in two seconds before putting them into a roll that simulates the G-forces of an F-16 jet. "When it's all over, you'll know what it's like being green," Universal brags.
	Source: Universal Studios.

What about families? Of course, Universal can't offer Mickey Mouse, and the signature rides at Islands of Adventure are geared more for adults and teens. But Universal hasn't entirely ceded the family market to Disney; Islands of Adventure also includes an area called Seuss Landing, which features such kid-friendly attractions as a ride based on The Cat in the Hat. Universal will probably never match Disney's appeal for families with young children, but Seuss Landing ensures that parents who want to keep their older kids happy don't have to worry that their younger children won't have enough to do for a day.

---

Will all this be enough to make Universal Studios Escape a success in the face of Disney's fierce opposition? Analysts are bullish about the park's prospects. Salomon Smith Barney predicts Islands will draw as many as 7 million visitors this year, eventually rising to more than 8 million visitors. Some of those visitors will come from Universal Studios Florida, the original park at Escape, which now draws close to 9 million tourists, according to Amusement Business. (Universal won't provide attendance figures.) Despite the cannibalization, Salomon expects Islands will produce $150 million in cash flow in its first year, a return on investment of 15% before taxes, interest and depreciation costs. Those margins aren't exactly Microsoft-esque (MSFT), but they're not bad. (Salomon rates Seagram a buy; the bank helped underwrite Seagram's $3.5 billion debt offering in December.)

Unfortunately, Seagram gets only half the park's profits, or about $75 million out of the $150 million in EBITDA that Islands is expected to produce. In contrast, Seagram's music operations are expected to generate more than $800 million in EBITDA this year, and booze will generate close to $700 million.

In other words, Islands will add about 5% to Seagram's total cash flow this year. That's a nice bump, but not exactly the windfall investors are hoping for. Meanwhile, Universal's film division is still sputtering, with both EDtv and October Sky falling short of the company's expectations. Liquor, while recovering slowly from the recession in Asia, remains a relatively mature business. And while music cash flow is expected to grow strongly in 1999, it's unclear how much of those gains are the result of big one-time charges Seagram took when it bought Polygram last year.

None of those question marks has stopped Seagram's stock lately. It has more than doubled from its lows of October 1998 and is up 25% since a skeptical TSC story in January. A general rally in the entertainment sector has provided a lot of juice, but so has growing confidence in the company's management. Lately, even Bronfman has managed to get some favorable press.

Given the relatively small impact Islands of Adventure will have on Seagram's bottom line, the park's real impact may be in convincing investors that the company, the runt of the entertainment industry since it bought Universal four years ago, is capable of generating a first-rate product. Mark Greenberg, the manager of the (FLISX)Invesco Strategic Leisure fund and a Seagram shareholder, found himself impressed after touring the park in February. "I was glad they executed it well, because it shows they know what they're doing," he says.

And comments like that may be more thrilling to Bronfman than even the sharpest drop on Dueling Dragons.

>To order reprints of this article, click here: Reprints