Insiders say talks are well-advanced and that a deal could be possible within weeks, valuing the Dutch-based business at $9bn-$10bn (pounds 5.4bn-pounds 6bn).
Neither side would comment yesterday but it is understood that discussions about a deal have been taking place between the two companies' advisers. Morgan Stanley is acting for Seagram, with Goldman Sachs advising PolyGram.
A deal would transform Seagram's music interests as its Universal/MCA operations are currently ranked a distant sixth in the big league of global music companies behind companies such as PolyGram, Time Warner, EMI and Bertelsmann. Seagram's interest was prompted by last week's announcement from Philips, the Dutch electronics giant, which said it was considering its options over its 75 per cent stake in the business. EMI's decision to terminate discussions with Seagram because no firm offer had been received would have provided a further catalyst.
Analysts said a deal between Seagram and PolyGram would be logical, as the two companies have complementary portfolios. MCA's main strength is in the US but it is weak in Europe, where PolyGram is a major player.
"It would make sense but not quite as much sense as a Seagram deal with EMI," said one analyst. He pointed out that PolyGram's top management might not be so keen to step aside whereas EMI had already restructured its top positions and currently had no chief executive.
Another said the deal would be "like two drunks leaning against each other for support" as neither MCA nor PolyGram is performing well.
In February PolyGram reported a 9 per cent rise in net income to 787m guilders (pounds 246m) but said it had been affected by the slowdown in music sales and the impact of economic turmoil in the Far East.
Edgar Bronfman, Seagram's chief executive officer, has been under increasing pressure from investors who are unhappy about the weak performance of the business. They have been unimpressed by Seagram's sale of its big stake in Du Pont, the US chemicals business, to finance the $5.7bn purchase of MCA in 1995. Since then the value of Du Pont stock has soared while Seagram's shares have under-performed expectations.
Although Seagram has apparently switched its attentions to PolyGram, analysts said EMI may still not be out of the spotlight. They said that although EMI terminated talks with Seagram last Friday, the Canadian group could still come back with a firm offer.
"If they came back with 650p per share it might be seriously tempting," said one analyst. "One thing that has become clear over the last few weeks is that EMI is obviously in play."
EMI shares fell 38p to 535p as they responded to the company's termination of the Seagram talks, which was made an hour after the stock market closed on Friday.
Both sides have since been trying to claim the upper hand. Sources close to Seagram claim that it was EMI that approached Seagram about a possible deal. This version of events is dismissed by some industry experts, who say it was the Canadians who took the initiative.
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