After weeks of public bloodletting, rumors and lawsuits, Ryan Kavanaugh’s Relativity Media filed for Chapter 11 bankruptcy protection today in Manhattan. That stops the clock on the mounting overdue debt payments that have paralyzed the company. What is most surprising about today’s development is that Kavanaugh remains in place atop Relativity — at least for the time being.
“Our board and management team explored a variety of options to refinance Relativity’s debt, and we ultimately determined that the protection afforded by a court-supervised reorganization process will provide additional time and structure to achieve our financial and strategic objectives,” Kavanaugh said in a statement today. With between $500 million and $1 billion in liabilities and $100 million and $500 million in claimed assets, the company filed voluntary petitions for its main Relativity Media holding and the various subsidiaries (read one here) Thursday afternoon. A first hearing on the Chapter 11 is set for tomorrow in NYC before Judge Michael Wiles.
“We all knew this was coming,” said one agency exec today. “Ryan’s got a lot of lives but they haven’t been real as a distributor for a long time, and in terms of the financing, people just don’t believe the money is there.”
Along with today’s petitions and the appointment of Brian G. Kushner as the Chief Restructuring Officer, Relativity now will enter a sale process. That sale is expected to be concluded by October, the company says. Paperwork to be filed later today will detail how the primary bidder for the company will be “RM Bidder LLC, an entity formed and owned by certain of the Company’s prepetition lenders.” Relativity has also received a $45 million commitment in debter-in-possession financing from some of its lenders to help pay its way through the Chapter 11 process. Being that Chapter 11s rarely go as smoothly as the filers desire, expect to see some more twists and turns in an already weaving tale.
As depressing as it has been, the unraveling of Relativity has been a marvel to watch. The Hollywood creative community has been dismayed to see a buyer and generator of movies and TV fall into precarious shape. At the same time, everybody seems to have a rumor to share about lavish spending by Kavanaugh — tales that are so widespread they are part of his aura. Kavanaugh always has been known as a charmer who is great at schmoozing the money men, a gift that fueled his first major business, co-financing slates for several studios with money from Elliott Management. Unfortunately, the company’s strategy of using research and algorithms to detect target niche audiences and generating moderate-budget movies aimed at them, hasn’t brought nearly enough success for debtors to wait patiently for a turnaround. If you look at the last couple years of film releases — The Best Of Me, The November Man, Brick Mansions, Three Days To Kill, Out Of The Furnace, Paranoia, House At The End Of The Street, Mirror Mirror, etc — most barely appear to have out-grossed their budgets. The only real hits were The Fighter (Paramount released it) and Limitless. While there have been planted and probably bogus stories about equity investments in Relativity that didn’t come to pass, Kavanaugh has been trying frantically to stave off what unfolds today and those debtors face an uncertain future over the money they’ve sunk into the company.
The Chapter 11 filing brings up more questions than it answers. Makers of movies that parked at Relativity have frantically been trying to extricate their films before today’s filing took place. Sources who’ve engaged in these discussions have said that if you funded the film independently and simply made a distribution deal with Relativity– as was the case with the Natalie Portman-starrer Jane Got A Gun which was extricated last night–then you were okay. If Relativity has equity in the film, it’s probably another matter and that’s could mire films like the Jared Hess-directed Masterminds and the Halle Berry-starrer Kidnap, because those are subject to the deep freeze of assets that occur when the company goes into Chapter 11. Today the company said it intends to go ahead with the release of those pics.
At question is what happens to the debts of over $320 million to Anchorage Capital and others, who now become creditors in an uncertain situation. At present, Relativity says that “none of these organizational changes affect the non-filing entities Relativity Sports, Relativity EuropaCorp Distribution or Relativity Education.” Still, bankruptcy was the last card for Relativity to play if the 11-year old company hoped to survive at all.
Kavanaugh tried every lifeline but the payday loan service hawked on TV by Montel Williams, but pulling finished films off the release schedule because there was no P&A to release them, and then laying off employees in non-core businesses, was a clear signal that bankruptcy would be the next chapter. For days, the discussion was whether institutional investors would put more capital into the company if Kavanaugh left, and the other talk was that lenders wanted Kavanaugh’s lieutenant Tucker Tooley to play a significant role in the overhaul of the company. Relativity recently hired Blackstone and FTI Consulting to help restructure the company. Rick Wynne and other attorneys at law firm Jones Day, who have been retained by Relativity for a while, were also part of the overhaul attempt.
Still, a reorganization of the company or a takeover by new management could be why pics like Masterminds, Kidnap and the Sundance comedy The Bronze may get released while the company is in bankruptcy, if hurdles are cleared. On the TV side, bankruptcy would also not undue granting of rights and hence there will be no interruption of the upcoming Limitless series on CBS, among the other shows Relativity is a producer on. Projects in development, like D.J. Caruso’s The Disappointment Room, with the company have been told in recent weeks that there would be no objections if they wanted to start shopping elsewhere. The same is true of first look options that Relativity has. While a number of features have cut loose from the company in the last 36 hours, people connected with film projects that Relativity still has a hand in are lawyering up themselves with attorneys specializing in bankruptcy proceedings, we’ve learned.
The questions that remain are, where does investor Ron Burkle fit into all of this? While unaffected now, happens long term with Red, the distribution pipeline half funded by Relativity and the other half by Luc Besson and Christophe Lambert’s EuropaCorp? On the latter front, sources have said that no Red employees were laid off and that EuropaCorp might simply spend the money paying distribution staff, if Relativity cannot meets its obligations. EuropaCorp formed the joint venture so that it could control its marketing and stop paying distribution fees to studios on hit films that have included Lucy and Taken. EuropaCorp’s first film through the Red pipeline will be The Transporter Refueled, a revamp of the Besson-created action franchise, which will open September 4. EuropaCorp, a well funded company, has a slate of homegrown movies and acquisitions coming right behind, including Valerian, the $180 million sci-fi film that Besson will direct, for which he unveiled an impressive array of futuristic storyboards at Comic-Con.
As Kavanaugh struggled to make ends meet, he also grappled with two multi-million dollar lawsuits this month alone from RKA Film Financing. The opportunistically-timed second suit, filed on July 24 and seeking $90 million, called Kavanaugh a “con man,” charging that Relativity misused a 2014 loan and failed to fulfill a payment obligation. The studio denied the charge, and filed a counter claim that RKA’s suit was designed “to extract additional (and significant) fees and concessions from Relativity as the company was negotiating with other lenders in connection with refinancing efforts.”
For years many have wondered about the mysterious collection of loans and equity sales that kept Relativity afloat with few clear successes in film, TV and other businesses including music publishing, sports management, and digital media. The collection of backers over the years variously included One West Bank, Barclays Capital, Macquarie Capital, Ron Burkle’s Yucapia Co., Paul Singer’s Elliott Management, Catalyst Capital, Colbeck Capital, and Anchorage Capital.
Despite the head-scratching arrangements, last year CEO Kavanaugh was talking big about the possibility of taking Relativity public in the U.S. and Hong Kong with support from Jefferies Group and China’s ICBC Bank. Jefferies also supported Relativity’s last-minute bid of as much as $1.1 billion, mostly in stock, for YouTube power Maker Studios — but lost out to Disney which offered $950 million in cash.
Along with that, Kavanaugh was clearly building toward an IPO that he hoped would solve the company’s funding problems once and for all. It is very possible that Kavanaugh became so consumed with deals and expansion that he did not focus enough on what is really important to make a company like Relativity Media successful: Making hit films and TV shows.
And even if Relativity makes it out of bankruptcy–MGM did so, but it James Bond and The Hobbit as assets, along with remake rights to a library of classic films–it might well have difficulty building trust back in the lending community, and just as importantly, in the Hollywood creative community because if you can’t get artists and their reps to trust you, a comeback will be impossible.
Deadline’s David Lieberman contributed to this report.