Relativity Media Files Bankruptcy; Film and TV Units For Sale
Relativity Media — the digital-age entertainment company that claimed clever financing and data analysis could help it unlock the secret to box office riches — filed for bankruptcy protection Thursday against a swarm of disgruntled investors and other creditors. The 11-year-old company that founder Ryan Kavanaugh had styled as a “next-generation global media company” will be sold at auction, a statement from the company said.
The upcoming sale will center on the enterprise’s film and television units. Left outside of the insolvency action are Relativity Sports, Relativity EuropaCorp Distribution, a joint venture with the European film operator, and Relativity Education. All those units will continue on as independent concerns. The company’s fashion operation, M3/Relativity was shut down this week and its employees laid off Wednesday as part of a pink-slipping of 75 employees.
Kavanaugh and his board proposed the immediate auction of the company, which stated liabilities of up to $1 billion, saying the sale of the film- and TV-maker should be supervised by the bankruptcy court. The action is designed “to strengthen its balance sheet and recapitalize the Company.” The statement envisions Kavanaugh, 40, and his senior management team remaining in charge. “Ryan Kavanaugh continues to serve as CEO and Chairman of the Board,” the announcement says.
Sources said that Kavanaugh already has been reaching out to investors, in hopes of bidding on some or all of the assets from his crumbling company. A spokesman for Relativity declined to comment on that contention.
Given the depth of the financial chasm the company faced — $320 million in loans that could not be repaid and tens of millions of bills from unsecured creditors — it could be difficult for Kavanaugh to maintain his perch atop the company. The CEO also was accused in a lawsuit filed this month in New York by a film financing firm with fraud, for allegedly misdirecting funds intended to be used for the release and promotion of Relativity’s film slate. Kavanaugh vehemently denied that allegation.
The Beverly Hills-based company announced that the firm RM Bidder will take control of the bulk of the mini-studio’s assets, which will be auctioned, as supervised by Blackstone Group and FTI Consulting, the latter a financial services firm that for weeks has already been overseeing Relativity’s troubled finances. The company said that it hopes the sale will be completed and closed by early October of this year.
Kavanaugh said in a statement: “Relativity continues to pursue its mission as a next-generation global media company, and we remain firmly committed to our film and television businesses. The actions we are announcing today will protect our valuable franchise and allow us to emerge as a stronger, more focused company.”
Kavanaugh added that the management and the company’s board had considered a number of options — as the company struggled to close a $320 million funding gap — but eventually decided that only a court-supervised reorganization would “achieve our financial and strategic objectives.”
In order to conduct ongoing operations, Relativity is pursuing $45 million in interim financing, known as a debtor-in-possession loan to help pay for the ongoing Chapter 11 process.
The company attempted an upbeat tone in the bankruptcy announcement, saying it will “continue to move forward with a robust production slate of scripted and non-scripted shows during the company’s reorganization process.”
In the near future, the studio said it plans to go through with the release of two of its films, the comedy “Masterminds” and the Halle Berry thriller “Kidnap.” It also intends to go through with production on its remake of “The Crow,” and hopes to begin shooting in the fall.
The rest of the slate, which includes the horror film “Before I Wake” and the thriller “The Disappointments Room,” is in play and will likely be sold off, sources say. Relativity plans to file for Debtor-in-possession financing, also known as a D.I.P. loan, so it can continue operations while it is in Chapter 11 protection. It is also in negotiations with other sources of funding to raise the money it needs to promote and distribute “Masterminds” and “Kidnap.”
The announcement also noted that one of its TV shows, “Limitless,” — spun off from the movie starring Bradley Cooper –is set to debut on CBS and it touted its MTV offering “Catfish.”
But many individuals connected to the company’s lenders and creditors said they expect a highly-contentious bankruptcy process, featuring multiple lawsuits. With senior lenders like Achorage Capital and Falcon Investments in line to get the bulk of the proceeds from the proposed auction, more junior lenders and a long list of unpaid vendors may only have leverage in the process if they threaten to hold up a settlement via litigation, said several experts.
An initial hearing in bankruptcy court is scheduled to take place in New York on Friday.
One of Kavanaugh’s last grasps for liquidity came earlier this month, when he entered into an agreement with a Canadian firm that buys into distressed properties.
But the partnership with Toronto-based Catalyst Capital Group fell far short of the anticipated $320 million infusion of debt relief and equity and even the smaller amount was soon taken over by another equity player. With Catalyst pushed aside, the balance of Relativity debt holders and vendors continued their campaign for financial relief; some demanding a change at the top of the mini-studio.
As payment deadlines came and went, Relativity pushed back film releases, told some vendors they would not be repaid any time soon and weathered a wave of anxiety at the company’s Beverly Hills headquarters. On Wednesday, the company laid off 75 of its 350 employees at its Beverly Hills headquarters. Employees received two weeks of severance, according to a person with knowledge.
One of the clearest signs that the company’s slide might be irreversible — without some form or relief — came on July 15, when a firm that loaned money to Relativity sued the company, saying that deal had been breached and that it was owed $7.5 million. The following week, P&A investor RKA Film Financing unloaded a second lawsuit that included much more serious allegations — calling the 40-year-old Kavanaugh a “con man” who “through dishonesty and deceit operated a scheme to defraud investors and convert and misappropriate their funds.”
The $90 million lawsuit in Supreme Court of the State of New York claimed that Kavanaugh and others at Relativity used hundreds of millions of dollars from lenders to prop up the failing entertainment company, instead of spending the money on film promotion, as mandated in a contract. Relativity countered with a $200 million countersuit against the P&A financing firm, claiming that RKA was trying to take advantage of media reports of the studio’s troubled refinancing efforts in order to make a profit.
Although Kavanaugh’s supporters had insisted almost until the 11th hour that he could find a new financial partner, the bankruptcy filing acknowledged what had become all too apparent around Hollywood — that the impresario with the shock of red hair and coterie of celebrity friends finally had run out of cards to play from an increasingly thin deck.
The run-up to the day of reckoning began in late May, when Colbeck Capital demanded performance by Relativity, which responded by accusing the New York investment house of spreading false rumors of financial instability. Relativity said Colbeck’s principals exaggerated the debt crisis in an attempt to take control of the mini-studio, the maker of films like “Immortals,” “Act of Valor,” “Oculus” and “Machine Gun Preacher.”
He didn’t need box office home runs to succeed, Kavanaugh had told reporters in times past. Instead, his company would rely on “singles” and “doubles” — profiting on films because of judicious production budgets and foreign pre-sales that meant little money had to be recouped domestically. But some of the singles turned into strikeouts. In 2013, for instance, the Liam Hemsworth thriller “Paranoia” grossed $7 million domestically on a production budget estimated at $35 million. In 2011, “Machine Gun Preacher” — with Gerard Butler as a one-time biker who rescues child soldiers — brought in just $539,000 on a production budget of about $30 million.
Kavanuagh at one time was a popular alternative funding source for studios like Sony and Universal, especially in the first decade of the new millennium. He also charmed some people by conducting himself like an old-time Hollywood mogul — hanging out with supermodels, partying with the likes of Leonardo DiCaprio and Bradley Cooper and flying around town at the throttle of his own helicopter.
His company got production credit on enough hits — such as “The Fighter” and “The Social Network” — to maintain credibility in some corners of Hollywood. Forbes put Kavanaugh’s net worth at $1 billion. As recently as June, a Relativity representative again suggested a public stock offering in 2016 would bring a big cash infusion.
But there were those who had long predicted his company could not be sustained. They greeted with incredulity Kavanaugh’s claims that he could reduce the chances of a flop by analyzing computer analysis data about a film — including genre, director, actors and potential release dates.
But there were signs that something had gone seriously amiss. The releases of “Masterminds,” “Before I Wake,” “The Bronze,” and “Kidnap” were all pushed back. When Relativity announced its plans to move “Masterminds” it publicly acknowledged the extent of its financial difficulties. According to a statement from Relativity, the extra time needed to release the movies was “to allow the company to focus on its recapitalization and give this film the proper attention and support it deserves.”
But within days, RKA had accused Relativity of misdirecting the very funds needed for such releases. The makers of other pictures were said to be scrambling to find new distributors, given the continuing unrest at Relativity. Now it will be up to a bankruptcy judge who gets paid, and when.
Relativity Media, LLC Petition
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