Elliott will now manage U fund Beverly 2

Relativity Media is getting out of the business of funding Universal pics, spinning off its co-financing element to minority stakeholder Elliott Management Corp. — maneuvering the fledgling studio clear of distribution conflicts with U while remaining its producing partner.

At the same time, CEO Ryan Kavanaugh is making progress on a deal to buy out Elliott’s stake in Relativity, and could complete the sale as early as September, sources close to the talks tell Variety. The pact includes five or six strategic partners that will put forth $100 to $200 million each, including J.P. Morgan, which would not just syndicate the deal but remain an active investor.

By jettisoning its Universal co-financing deal Wednesday, Relativity also moves a step toward its goal of exiting the co-financing game and reaping more multiples from movies it produces inhouse. Relativity will continue to produce U pics, with Kavanaugh taking an exec producer credit, meaning Relativity will receive producer fees wtihout sharing the risk.

“As our core business of developing, producing and distributing our own product has grown to be competitive in size and scope with the majors,” Kavanaugh said in a statement, “this move allows us to focus our energy on that business.”

Relativity and Elliott announced the move jointly on Wednesday evening, adding that Elliott has agreed to inject additional coin into the upstart studio’s own production slate. It did not disclose the amount of additional financing.

Universal declined to comment on the new arrangement, which ends a co-financing pact Relativity forged in 2008. Since then, the two sides have divvied up costs and returns on several pics including “Despicable Me,” “Couples Retreat,” “Robin Hood” and “Little Fockers.” Relativity also has a long-standing co-financing deal with Sony that sunsets in 2012 and won’t be affected.

The spinoff was done largely to steer Relativity clear of conflicts that have arisen with Universal while wielding its new distribution biz. Case in point: In the past few weeks, Relativity and U have been one-upping one another’s Snow White projects, which started when Universal dated “Snow White and the Huntsman” ahead of Relativity’s untitled project and effectively ended a week later when Relativity jumped ahead by more than two months.

The move also sheds light on Michael Joe’s move last month from Relativity over to Elliott, which many interpreted at the time as a power play by Kavanaugh’s hedge-fund backer. Joe, whom Kavanaugh hired away from Universal a year ago, will now oversee the Universal-earmarked fund, called Beverly 2, in his new position at Elliott.

“This move allows Relativity to focus on producing and distributing its own homegrown product,” said Joe, who takes the prexy title at newly formed Elliott Media Investments.

Joe has continued to work from his Los Angeles offices at Relativity since his move was announced, though he plans to take separate digs in the near future.

Elliott’s co-financing deal with Universal will not be affected should Kavanaugh successfully buy out the hedge fund, his primary backer since launching Relativity. That deal is further along than previously reported, and is expected to close between September and December, sources tell Variety.

Elliott released a statement Tuesday that it wasn’t looking to sell its stake in Relativity, but Kavanaugh’s position as majority shareholder and options built into his contract with the hedge fund give it little recourse should the new investment group come together in time.

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