The clock is ticking for Ryan Kavanaugh and his Relativity Media. Multiple sources tell Deadline that time is running out for the Relativity founder/CEO to come up with yet another financial save — either in a restructuring or a reverse merger (which has been explored as recently as one month ago with Cinedigm), to get an extention (or reprieve), or to find a white knight equity investor. At issue is that a repayment — around $250 million to lenders (one of which is Colbeck Capital) which sources said is coming due before month’s end.
Kavanaugh, who’s no dummy when it comes to financial maneuvers, is said to still have only a few weeks to pull another rabbit out of his hat and is known to be in discussions with both potential debt and equity investors. According to one source there is “a specific white knight’ who Relativity is in negotiations with right now to infuse capital into the company and because of that possibility, creditors have given Relativity a 30-day extension to see if a deal can be sealed. The initial deadline was May 31.
Kavanaugh has pulled it off before, but sheesh, what a way to run a company swinging from one financial lender to another throughout the financial forest. Only six days ago, Relativity announced that it had hired Blackstone, FTI Consulting and law firm Jones Day to help guide them on trying to restructure their financial picture. In fact, Relativity just appointed a consultant from FTI, who “will work closely with CEO Ryan Kavanaugh to continue to optimize Relativity’s financial and operational profile … as we further position the company for long-term growth,” said Relativity spokesman David Shane.
Whether they can pull it off this time is unknown. “We’ve been watching this company for a long time and have just been waiting for the other shoe to drop,” said one top banker. Asked about a possible IPO which has been rumored for some time, two sources said that they could do it in a reverse merger, but any company up for that idea would have to be willing to take on the debt.
One source noted: “the valuation of the company would be very challenging to get that done” while another said “their financials may not stand up to go public.” But that would depend on what exchange they would go public on. A number of factors must be taken into account in order to that to move forward as there are different rules for different exchanges. A lot of that has to do with liquidity.
According to Relativity spokesman David Shane, “The company and its lenders have entered into a formal agreement that allows Relativity additional time to close its previously agreed upon financing transaction. This ensures Relativity additional liquidity as discussions continue. (Kavanaugh and Relativity) are deeply appreciative of its lenders’ ongoing support, and the company looks forward to continuing to work with its lenders to position us for long-term success.”
About six months ago, One West Bank and Dune Capital’s Steve Mnuchin got involved with the company and put equity into it. Add that to billionaire investor Ron Burkle and Elliot Management’s Paul Singer and you have some very rich minds tackling this issue. Any reverse merger — like the one that was entertained with Cinedigm (NASDAQ: CIDM)– would have to come after the financial structure is straightened out. Another possibility is a white knight — someone to assume the debt in exchange for equity in the company.
While the Sports, Reality TV, Netflix agreement and even international divisions are considered strong assets for the company, the last two (Netflix, international), of course, sits on the shoulders of the movie division which has been faltering. To that end, the movie division recently pushed one of their films into the fall so they could concentrate on opening Mastermind starring Owen Wilson and Zach Galifiankas. They are said to have enough funds to bring that one to market on August 19. While, CBS just picked up the company’s first scripted pilot Limitless and the Reality TV division is strong (Grocery Games, Kitchen Inferno), one source noted that the Sports division is saddled with a number of lawsuits.
Kavanaugh and his allies have been working hard to keep the company afloat but that task has been complicated by number of loan arrangements and facilities keeping the company together. That is how Colbeck joined Relativity in the first place when, in 2012, the financier played a key role in a $350 million debt financing deal that Relativity used to fund films and its business expansion. New York-based MESA Global was also an advisor on that deal. Since 2013, Relativity’s films have decidedly underperformed.
While the company has offset its risk to some degree with its international output deals — most recently announcing in Cannes new outputs with Tele Munchen in Germany and Austria, as well as an expanded Latin America deal with Imagem — the company has not had many successes along the lines of The Fighter and Limitless in 2010 and 2011, respectively. Recent months have been particularly rough with Woman in Black 2: Angel of Death, Black or White and The Lazarus Effect all modest earners — however, a company source says that they were all profitable films. They released a total of eight films last year, including 3 Days to Kill that grossed $52.59M worldwide on what Relativity said was a $28M production budget.
Kavanaugh has long asserted his films do not need to be big grossers to be profitable, given his adherence to disciplined budgets and offsetting risk against international pre-sales.
Another option could play out. If Kavanaugh and Relativity do indeed default on the lender payment, then sources have told Deadline that the lenders (Colbeck saw its two board members Jason Colodne and Jason Beckman acrimoniously kicked off the Relativity board two weeks ago) could push for the company to go into involuntary administration or a Chapter restructuring.
Another intriguing possibility mooted by some is for EuropaCorp, who have RED a joint venture domestic distribution venture with Relativity, to take over not just RED but also potentially the day-to-day Relativity operations (insiders at EuropaCorp deny this). EuropaCorp’s sole link to Relativity is that it pays half salaries for the Red employees, with Relativity paying the other half. EuropaCorp puts its pictures through that pipeline and controls its marketing and distribution fortunes, with the first film, The Transporter Refueled, coming September 4. EuropaCorp already has output deals around the world, and a major production studio in Paris. EuropaCorp’s motive in Red was to have control and keep the upside in its production creations after placing hits like Lucy and Taken at other studios.
Intriguingly, reports have surfaced in France of EuropaCorp founder Luc Besson looking to de-list the 25% of the company which has been on the French stock market since 2007. Though offering a much-needed capital injection at the time, being a public company has proven a constant burden for Besson and his chief exec Christophe Lambert. Last November, the company announced it had closed a $400M credit line, plus a $50M second credit facility and a $150M accordion. Coupled with the success of Besson-directed Lucy, with worldwide gross of $444 million, the company is on a firmer financier footing.
Nancy Tartaglione contributed to this report.