RUMORS AT UNIVERSAL BURN INVESTORS' EARS.

Byline: Dave McNary Daily News Staff Writer

Rumors of a massive shake-up swept through Universal Studios on Friday with scenarios such as entertainment heavyweights Barry Diller or Steven Spielberg taking over the slumping film operation.

Wall Street reacted with gusto to the speculation, pushing shares of Universal's parent - Seagram Co. - over $40 for the first time since July on heavy trading.

Demand for shares was so strong that trading stopped twice due to order imbalances - once for nearly two hours - as 3.18 million shares changed hands, more than four times the average daily volume during the last six months.

``Today's activity is due to speculation about possible changes at Universal,'' said analyst Harold Vogel of Cowan & Co. ``The market likes to jump the gun on this kind of situation.''

Universal denied the speculation about Diller and Spielberg. And Montreal-based Seagram, in response to a request from the Toronto Stock Exchange to explain the high volume of activity, only cited its long-standing policy to not comment on speculation.

But the rumors reflect the widespread belief that Seagram chief executive Edgar Bronfman Jr. is facing massive pressure from Wall Street to improve the studio's performance quickly.

The speculation was sparked partly by Universal's announcement late Thursday that marketing honchos Buffy Shutt and Kathy Jones resigned after four years at the studio. They became the third and fourth top executives to leave the studio within the last 10 days following the departures of Marc Platt as president of production and Howard Weitzman as executive vice president of corporate operations.

Universal has been hitless since releasing Spielberg's ``The Lost World: Jurassic Park'' in May. High-priced disappointments since then included ``The Jackal,'' ``For Richer or Poorer,'' ``Primary Colors,'' ``Blues Brothers 2000'' and ``Mercury Rising,'' and its share of 1998's domestic box office is a meager 6.1 percent.

The resignations are believed to have come at Bronfman's instigation and suggest he may oust other executives such as Universal Studios Chairman Frank Biondi, film Chairman Casey Silver and studio President Ron Meyer.

Bronfman could then turn to Diller, who controls Universal's television assets through a $4.5 billion deal struck last fall, or to DreamWorks SKG, the 4-year-old studio operated by Spielberg and fellow entertainment titans Jeffrey Katzenberg and David Geffen.

Seagram officials have denied a report in the New York Post this week that top-level talks were held with Diller and DreamWorks officials about a possible takeover. Other speculation: A takeover by Brian Grazer, co-head of Imagine Entertainment with actor/director Ron Howard and a major supplier of films to Universal.

Whatever Bronfman decides may not have much short-term impact, since the studio has not been able to find a new source of must-see movies since Spielberg moved to DreamWorks. Universal's slate for the critical summer season offers no apparent match for the likes of Sony's ``Godzilla,'' 20th Century Fox's ``X-Files'' and Disney's ``Armageddon.''

Universal's upcoming films include the action-adventure ``Black Dog,'' with Patrick Swayze; ``Fear and Loathing in Las Vegas,'' based on Hunter S. Thompson's novel and starring Johnny Depp; and a George Clooney police drama, ``Out of Sight.''

Bronfman is undoubtedly feeling pressure to fix Universal from angry Seagram stockholders because of its lagging stock price. Since Bronfman financed Seagram's $5.7 billion purchase of 80 percent of Universal by selling Seagram's 24 percent stake in chemical giant DuPont in 1995, Seagram shares have gained about 25 percent while DuPont shares have more than doubled.

Perhaps most galling to shareholders is that stocks of most other media companies have performed far better than Seagram during the last three years.

Bronfman, 42, has also seen his reputation suffer for other reasons:

An unsuccessful attempt to lure Michael Ovitz to run Universal before the one-time Hollywood super-agent joined Disney for an ill-fated tenure;

A deal with former studio chief Sid Sheinberg that produced bombs like ``That Old Feeling'' and ``McHale's Navy'' and generated $150 million in losses;

The sale of cash-generating TV assets, including the USA Network, to Diller for what some analysts believe was a less-than-premium price;

Extensive reorganization in an attempt to bring ``real world'' business practices to Universal, which may have distracted management from concentrating on the core businesses of movies, television, theme parks and music;

The recent public ruminations that movies should be priced much like any other consumer product, with higher quality, more expensive movies costing more than low-end productions. He was widely derided in Hollywood for the idea.

Arthur Rockwell, an analyst with Rockwell Capital Management and a former studio executive, said Bronfman has moved too slowly to fix Universal in the hyper-competitive world of entertainment. That's led to the perception that Universal is not clearly focused like Disney, Sony and Fox, Rockwell said.

He also believes pressure from institutional shareholders will leave Bronfman with little choice but to make changes to boost the stock price, up to and including the possible spinoff or sale of Universal. Should that fail, Bronfman himself may be forced to resign.

``The institutional holders are the ones calling the shots these days and you really have to respond in a raging bull market,'' he said. ``It's all about what these big guys think, which is an obsession with stock price.''

Seagram stock traded as high as $40-3/4 Friday before closing at $40-1/4 for a one-day gain of $2-5/8.

The Bronfman family controls slightly more than a third of Seagram's stock, according to the company's most recent Securities and Exchange Commission filings. No other entity owns more than 5 percent of the company's shares.