Genre label expected to sell for bargain price

Oh the horror.

Universal Pictures is in negotiations to sell its 4-year-old Rogue Pictures — a genre division that specializes in scary fare — to Ryan Kavanaugh‘s Relativity Media for what some dub a bargain price of $150 million.

So, why would the studio be willing to sell short on a label with an excellent track record (according to insiders, 55% of Rogue titles are profitable — a rate that is nearly double the studio average)? The move speaks volumes about how cash-flush players like Kavanaugh stand to gain amid the global economic downturn.

Media conglomerates are desperately looking to reduce overhead, and Universal parent company General Electric is no exception. Coming off a brutal 12-month stretch where its stock price lost more than half its value, GE mandated that Universal sell something fast to beef up its fiscal-year balance sheet. That something looks to be Rogue, a low-risk label that has been consistently profitable — albeit on a scale that made barely a dent in GE’s bottom line.

Enter Kavanaugh, whose Relativity received a $1 billion infusion in September from New York-based hedge fund Elliott Associates, leaving the production and finance company with more than $2 billion on its balance sheet. At the time, Kavanaugh said he was looking for bargains. “Because of the craziness in the marketplace, there are suddenly many attractive assets available to buy,” said Kavanaugh, who declined comment for this report. “We plan on buying significant companies and libraries in the near future.”

If the Rogue deal closes, Universal might find itself holding the short end of the stick. According to a source familiar with the pact, three independent evaluators pegged the value of Rogue at anywhere between $240 million and $380 million.

“In any other market, Rogue would command twice as much,” the source adds.

Still, GE is eager to pocket the cash and move Rogue’s overhead off its books. The deal, which is in the letter-of-intent stage, would result in Relativity owning a library of some 30 titles, including Rogue’s debut pic “Unleashed” and the more recent horror hit “The Strangers,” which took in $53 million this summer. Rogue assets also include 40-50 projects in various stages of development such as a “Strangers” sequel, which has a finished script.

Universal brass say if the deal closes, it’s a win-win situation because the studio will distribute future Rogue titles, including four that are already in the can, and collect a discounted distribution fee of less than 10% (the standard rate is 12%, though companies like Marvel, DreamWorks and DreamWorks Animation pay 8%).

Relativity, which in late September reupped its commitment to co-finance the majority of U’s slate through 2015, is already a strategic partner of the studio. Through their slate financing deal, Relativity has put up 50% of the coin on such recent U pics as “Mamma Mia!,” “The Mummy: Tomb of the Dragon Emperor” and “American Gangster.”

Talks between Universal and Relativity began four-five months ago, when Kavanaugh was considering coming in as a co-financier on a Rogue picture — something that Relativity did not typically do as Rogue already had a slate financing deal in place with Intrepid Pictures (that pact is soon to expire).

Universal, which also flirted with other bidders, including Spyglass and Morgan Creek, decided it was wise to take the money quickly, be in business with a partner and eventually funnel the films back through U’s distribution system.

So, will Focus Features follow as the next U asset to be sold? U studio brass gave an emphatic “no.”

Still, in tough economic times, anything is possible, as rumors swirl that everything from Miramax to MGM is on the sale block. As Kavanaugh once noted, “Everything is available for a price.”

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