Relativity Media higher ups were “freaking out,” we hear, after Netflix told the U.S. Bankruptcy Court last night, in a strongly worded filing, that it wants out of a deal to license the studio’s movies.
The reasons may help explain why the studio has kept so many details of its plan to exit from Chapter 11 bankruptcy protection shrouded in secrecy — and why it was so eager early this month to announce that Netflix’s House Of Cards star Kevin Spacey will help to run the studio.
It seems that the financial models Relativity CEO Ryan Kavanaugh built to persuade investors to back the studio assumed that it would continue to collect licensing fees from Netflix. The streaming media power has paid Relativity $283 million since 2010.
If Netflix can back out, then investors may consider Relativity to be too risky a bet. “No one expected Netflix to come out so strongly (today). It seems they are using this Bankruptcy to try wrangle out of the deal, but (Relativity and Netflix) have an agreement in place and (Relativity) expected them to stick to it,” noted one source with skin in the game.
A spokesman for Relativity said it is not “freaking out.” Indeed, “we were not at all surprised by the colorful language in Netflix’s objection. In fact, we expected nothing less than [for] Netflix to try to once again use the Chapter 11 process to renegotiate Relativity’s agreement with Netflix which doesn’t expire until 2018.”
Still, if Netflix goes away, then it could mean big trouble for the studio. Relativity needs the streaming service on board to assure U.S. Bankruptcy Court Judge Michael Wiles in a February 1 hearing that Relativity’s ready to stand on its own feet — and free it of many debts and deals that forced it to seek a fresh start.
The studio wants to be on its own as soon as possible. It says that it needs time to make good on its plans for 2016 to release The Disappointments Room, Before I Wake, Kidnap, Masterminds and Strangers 2 — and begin production in March on The Crow.
Netflix understands that it’s key to Relativity’s plans. Its license payments are probably “material,” the streamer says, even though the studio’s financial forecast “fails to expressly discuss the extent to which the projected revenues are reliant on expected license fees from Netflix.”
That’s one of the reasons Netflix wants the court to scrap the licensing agreement with Relativity.
“Unless the Debtors can demonstrate that their projections are viable even without Netflix license fees, the Plan is simply not feasible, and therefore cannot be confirmed,” it says.
The studio may be in trouble if Wiles agrees with Netflix’s argument that there are too many holes in Relativity’s case. The licensing deal is in jeopardy if it’s unclear that the studio can fulfill its commitment to deliver an undisclosed number of “quality films on a stable and ongoing basis,” Netflix says.
One big concern, shared by others objecting to Relativity’s plan: The studio hasn’t identified the source of $160 million it says that it has raised.
It also has provided “no meaningful information on who will run the day-to-day operations or their qualifications, and no business plan or other information to support the Debtors’ incredibly optimistic financial projections.”
A Relativity media spokesman said that the investors it must present to the court on February 1 are not contingent on the Netflix deal.
What about Relativity’s recent agreement with Spacey? Relativity said early this month that it has an agreement effective in mid-February to buy Trigger Street Productions, which the actor and Dana Brunetti own and operate. They would then “oversee all creative content and film production” for Relativity.
Spacey talked up the arrangement this week at the World Economic Forum in Davos. He says that he and Brunetti will focus on films that cost less than $50 million to produce.
“Studios have abandoned those films, but I think there’s a big reason why most great filmmakers, actors and writers have gone to television,” he said. “The ground is very fertile for character-driven drama. And there is a vacuum in independent film for character-driven drama” at those budgets. “We want to say ‘Come to Relativity, we’re very interested in giving audiences those kind of stories.’”
That should be music to Netflix, which plans to spend heavily for original productions.
But the company suspects Relativity is playing with smoke and mirrors. The announcement with Spacey creates “considerable confusion,” Netflix says, since other releases indicate that Kavanaugh and investor Joseph Nicholas will co-manage Relativity.
“This is particularly troubling given that the Debtors have not filed anything with the Court amending or supplementing the Plan to address the transactions with Trigger Street or Spacey and Brunetti, or otherwise disclosing any such transactions,” Netflix says. “This leaves it unclear whether the transactions with Trigger Street, Mr. Spacey, and Mr. Brunetti have even been finalized, despite the Debtor reporting them as a done deal.”
If Netflix is right, and Wiles agrees, then Relativity had better watch out. Its financial structure might collapse like, well, a house of cards.
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