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No Sea Change at Seagram

The booze-and-tunes conglomerate has disappointed investors before -- and it looks like it will do so again.


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could soon disappoint investors again.

That's the view of a couple of money managers who've recently cashed out of their Seagram shares amid a run-up in the company's stock, which hit an all-time high last week. In fact, one of the managers is so confident that Seagram's recent gains have gone too far that he's now shorted the Canadian booze-and-tunes conglomerate. (Short-sellers sell stock they've borrowed from other investors, hoping to buy it back and return it later after its price has fallen.)

The bearish take runs counter to the view of some well-known sell-side analysts who have recently grown more positive on Seagram stock. But unlike most of the bulls, the bears haven't gotten fees from Seagram for investment banking work -- and they have money on the line if they're wrong.

Since its lows of October, Seagram has risen to about 45 from 25, a heady 80% gain. Yet analysts are only getting more bullish. In the past two weeks,

Bear Stearns

has reinitiated coverage of Seagram with an attractive rating, while

Merrill Lynch

has increased its price target to 50 from 45, even as it simultaneously lowered its per-share cash-flow estimate for the company by 25%. The analysts say gains in several of Seagram's businesses show the company's long-awaited turn has finally arrived. (Bear Stearns and Merrill helped underwrite Seagram's $3.5 billion debt offering in December.)

The money managers agree that Seagram's businesses are showing marginal improvements. But they argue that investors who buy now are paying richly for a company whose performance has been dismal for most of this decade. They say Seagram paid too much for


, the Dutch music conglomerate that Seagram bought for $10 billion last year in an effort to create a worldwide music powerhouse. In addition, they point to the company's ongoing woes in Hollywood, where the company's


unit ended 1998 with the lowest box-office share of any major studio in two decades.

The company's liquor business remains weak, although its decline has apparently stopped, and an expansion of its Orlando theme park faces intense competition from


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, which opened its own expansion last year.

As a result, the company is expected to post a loss in fiscal 1999, which ends in June, according to analysts' estimates. Five years ago, Seagram earned almost $2 per share, but its earnings have fallen in four out of the past five years. Finally, even Seagram's fans admit that President Edgar Bronfman Jr. still hasn't proven himself to either Hollywood or investors.

The money managers say all that bad news makes it hard to justify Seagram's capitalization, which is now about $27 billion, including $9 billion in debt.

"They're bleeding cash ...

yet the stock has tacked on about $9 billion in market cap since the lows of October, about $3.9 billion since the beginning of the year," says Ronald Kraft of

Gotham Capital Management

. Gotham, which manages about $45 million, bought Seagram in the low 20s in October, sold in the 30s and now has shorted the stock.

"This thing could go right back down to 30 bucks," says another manager, who asked to remain anonymous. In the past week, this person sold all of his firm's stake in Seagram, more than 1 million shares. "This was a classic value play in the low 30s, a very liquid balance sheet, underleveraged," he says. "What happened is they become much more levered, and the market decided they were worth 50% more. ... You say to yourself, 'Why has the stock gone from 30 to 48?'"

If Seagram does give up its gains, the reversal wouldn't mark the first time the company's stock has made a quick round trip. Between August 1996 and June 1997, Seagram rose from 33 to 42. Then it skidded to 30 in December 1997 before rising to 46 in May 1998. After that, the stock headed down, hitting 25 in October. Now it's turned up once more.

Still, some analysts say this time is different. They think the company will be able to keep its promise of cutting 20% of the 15,000 jobs in its music division without doing long-term damage to the business, and they say the film and liquor divisions have bottomed.

"It just seems that all of their businesses are doing well at this point," Merrill analyst Jessica Reif says. Reif, who recently toured the company's new "gate" at its Orlando theme park, set to open this spring, says the expansion is "pretty amazing. ... There's no question that for the next several quarters, the numbers should be very good."

"All the businesses are improving simultaneously, with the liquor business in Asia coming back pretty strongly already, PolyGram in recent weeks recovering all the lost market share in 1998 on the music charts


Patch Adams

being the first $100 million film Universal has had


The Lost World


Deutsche Bank Securities

analyst Alan Kassan says. (Deutsche Bank has no investment banking relationship with Seagram.)

Two other Universal films,

American Pie


October Sky

, also are expected to do well this spring. Universal has especially high hopes for

October Sky

, which it claims has had among the highest test scores "ever recorded for any film" at sneak previews.

A Seagram spokeswoman says the company's restructuring remains on track, and Seagram still anticipates saving $300 million annually from cost cuts in its music business. The company doesn't talk about movements in its stock price, she says.

But even a couple of hits won't soothe Bronfman's relationship with Hollywood, which has been cold to him ever since he called it "a dumb town" and began his seemingly endless restructuring of Universal three years ago. And with the live-action film business barely profitable even at the best of times, dissing your talent supply isn't a good idea.

Miscues like that have left some analysts unconvinced that Seagram's turnaround is real. "Nothing has improved in terms of the fundamentals of the company, and yet the stock is now rich,"


reported Monday. (Schroder has no banking relationship with Seagram.)

If history is any guide, it may not be rich for long.