Seagram also said it plans to spin off its Tropicana fruit juice business in a $3.5bn-$4bn deal.
Cor Boonstra, chairman of Philips, will join the Seagram board. Management of Universal Studios, Seagram's music and film division, were scheduled to meet today to identify the management team which will lead the combined group.
Seagram is also looking to sell PolyGram's film division, in which Canal Plus, the French media group, has expressed an interest.
The cash and shares deal, which will create the world's largest music company, values PolyGram at $59 per share. The two companies last week confirmed they were holding discussions following weeks of market speculation. Seagram had previously approached EMI, the British music group, about a possible pounds 5bn deal but failed to agree a price satisfactory to EMI's board.
PolyGram is home to rock superstars like Elton John and U2. Universal, which owns the MCA and Geffen record labels, releases music from artists such as country and western star Reba McEntire. Seagram estimated it will reap $275m to $300m in annual cost savings by integrating the two record labels.
Seagram, which owns Chivas Regal, Absolut Vodka and Grolsch beer, bought 84 per cent of Universal Studios several years ago. In addition to the music business, Universal's assets include the famed movie company, television operations and theme parks.
Seagram said that Universal would acquire Philips' 75 per cent ownership position in PolyGram through a tender offer for all issued shares, including publicly held shares, for $59 per share in cash or, at the shareholders' election, for cash and Seagram common shares.
The agreement in principle calls for Seagram to issue a maximum of approximately 47.9 million common shares (12 per cent of the outstanding shares after the transaction), or approximately $2bn in value.
The Seagram and Philips boards unanimously approved the agreement in principle, and PolyGram's board has recommended the offer to PolyGram shareholders.
The sale of Tropicana Products will be through an initial public offering of common stock. Seagram said it was selling Tropicana as part of its continuing effort to realign its assets as well as to realise the subsidiary's full value for Seagram shareholders.
Edgar Bronfman, Seagram's chief executive, said: "These announcements herald an important transformation of Seagram. We will manage two highly focused businesses of global scope and scale - entertainment and spirits and wine. With the acquisition of PolyGram, we become a global entertainment leader, including the world's largest music company, with a truly impressive roster of musical talent. We're delighted to be buying the world's pre- eminent music company and to be able to integrate it with Universal at an estimated cost saving of $275m-$300m annually."
Mr Bronfman continued: "While we become predominantly an entertainment company as a result of these transactions - we remain as committed as ever to our spirits and wine businesses. "
Frank J Biondi, chairman and chief executive of Universal Studios, said: "The addition of PolyGram to Universal's operations moves us to the forefront of the entertainment industry."