BUYOUT FUNDS EYE DEAL FOR POLYGRAM; BID COULD IMPEDE OFFER BY SEAGRAM.

Byline: Geraldine Fabrikant The New York Times

Forstmann, Little and Thomas H. Lee Co., two of the nation's largest leveraged buyout funds, are weighing a bid for Polygram NV, the giant music company, several people close to the discussions said Tuesday.

The team's investment banker, Allen & Co., has sent letters to both the supervisory board of Polygram and its parent company, Royal Philips Electronics NV, the giant Dutch electronics company that owns 75 percent of Polygram, saying that they are interested in exploring a bid. So far, there has been no response to the letters, which were sent Monday, one person close to the discussions said.

Seagram Co., which owns MCA and Universal Studios, already had been in talks with Philips over a possible acquisition of Polygram. Seagram and Philips are believed to have set a deadline of Sunday to reach a deal. The possibility of a rival bid, however, might complicate matters since Philips would be obliged to consider it for the sake of its shareholders.

Officials from both Seagram and Philips declined to comment. Philips Chairman Cornelis Boonstra was in New York on Tuesday.

Although the price being considered by either Seagram or the buyout firms is not known, Polygram, whose shares trade on the New York Stock Exchange, has a market value of $9 billion.

The letters from Forstmann, which is based in New York, and Thomas H. Lee, in Boston, do not mention a powerful Hollywood figure who could well play a role in a possible deal: Michael Ovitz, the former talent agency chief who was ousted in 1996 as president of The Walt Disney Co. Ovitz was instrumental in bringing the two firms together, people close to the discussions said.

Ovitz is a friend of Forstmann, Little Chairman Theodore Forstmann, and is on the board of Gulfstream Aerospace Corp., which is controlled by the firm. In addition, in a deal announced last month, Ovitz invested $20 million in and took control of Livent Inc., the troubled theatrical production company based in Toronto. As part of the deal, he and Lee, whose firm owns 8.5 percent of Livent, agreed to support each other's nominees for the board.

The possibility that buyout firms would bid for Polygram had some record industry experts scratching their heads Tuesday. Seagram, which has a successful record company of its own, can offer economies of scale that are not available to the firms. Seagram could cut marketing, distribution and other costs, for example, that might save it as much as $200 million to $350 million a year, the industry experts say.

A leveraged buyout group, on the other hand, probably would have to put up $2 billion to $3 billion and borrow the balance to buy Polygram, whose artists include Elton John, U2 and Janet Jackson.

Though the numbers are not public, each firm is estimated to have a fund of about $4 billion. In general, leveraged buyout funds by policy do not put more than 25 percent to 40 percent of their funds into a single deal. But in some cases, to raise additional equity financing, they they ask investors whether they want to invest alongside the fund.

An offer from two buyout firms might appeal to the president of Polygram, Alain Levy, and his management team. They would presumably have a better chance of staying in place under a financial buyer with no management team of its own than if Seagram bought the company. Both Forstmann and Thomas H. Lee are known to expand companies and then either sell them or take them public.