MESA Global leads deal to fund mini-major's expansion plans

Relativity Media is closing its deal for the $250 million it had set out to raise through boutique financial firm MESA Global, funding the company’s expansion plans and putting more coin in the coffers for future films.

Deal has surprised skeptics, who thought Ryan Kavanaugh’s mini-major lacked the assets to collateralize such a large infusion of capital.

The transaction has all but closed, and multiple sources tell Variety that it will fund in the next day or two. Relativity declined to comment.

Company plans to expand through strategic investments, including reports that it will buy a majority stake in Germany-based distrib Senator Entertainment, in which it already has a minority holding.

Though the new capital is not specifically earmarked for film production, Relativity has the flexibility to use some of it to finance its slate.

Deal pairs Relativity with the New York-based capital-raising firm that helped advise Relativity investor Ron Tutor and Colony Capital in their joint 2010 bid for Miramax.

Relativity’s new funds come from around a half-dozen lenders, including billionaire supermarket magnate Ron Burkle, already a minority stakeholder, who anchored the MESA deal with around $75 million of junior capital through the Colbeck Capital fund (in which he is a major investor).

Variety first reported in April that MESA was working to raise $200 million of capital for the company, but sources say the deal ended up oversubscribed and closer to $250 million. Gotham-based MESA – run by founding partner Mark Patricof out of New York with managing director Marni Wieshofer overseeing operations in Los Angeles – has advised on several billion dollars in transactions, including the sale of music lyrics database Metrolyrics and Tinopolis’ acquisition of Arthur Smith and Co., one of the largest producers of unscripted television in the U.S.

Mini-major will not use all of its new funds at once, drawing immediately on about $75 million, according to sources with knowledge of the company’s plans. But given Burkle’s recent purchase of a minority stake, some financial observers wonder what Relativity is using as collateral.

MESA’s Relativity transaction relies heavily on close to $60 million in receivables from “Mirror Mirror” and “Act of Valor,” according to multiple sources with knowledge of the deal.

Relativity is also likely using its TV business, RelativityReal; division currently has dozens of projects in active production, according to a company spokesman, including MTV’s “Catfish,” Food Network’s “Restaurant Stakeout” and Bravo’s “Miss Advised.” RelativityReal also has overall deals with TV vets Jay Blumenfield and Tony Marsh, Wilmer Valderrama’s WV Enterprises, Ashley Tisdale’s Blondie Girl Prods. and exec producer Ellen Rakieten.

Relativity’s other assets include about 50 produced films as well as 20 pics from its acquisition of the Rogue library. It also has a music and sports management business, the latter of which most famously counts the New York Knicks’ Amar’e Stoudemire as a client.

But it’s unclear which assets are under obligation to Burkle, Relativity’s main backer. In January, the mogul reportedly purchased a minority stake in the company, buying down previous backer Elliott Management. Terms of that deal – including collateralized assets – were not disclosed, leading some to wonder which assets would be free for Relativity’s new round of fundraising.

The new arrangement encompasses two parts: senior debt (least risky) and mezzanine debt (more risky). The better the collateral, the lower the risk for lenders, and therefore the lower the interest rate.

It appears that Kavanaugh was able to borrow the money at competitive interest rates: The senior debt – considered the safest as it’s repaid first – is expected to carry an interest rate of close to 6%. Current rates for similar deals come at about 5%.

The mezzanine portion – repaid after senior debt – is estimated to run at a cost near 12%, which falls on the low side of comparable deals. Financial experts say that type of debt suggests the deal may not be fully collateralized, meaning some of the coin could be used for performance or production risk, i.e., future films.

Mini-major has 11 pics set for release next year and several in production, including “Out of the Furnace,” “Safe Haven,” “Paranoia” and “21 and Over.” Relativity also just partnered with Luc Besson’s EuropaCorp for a co-production and co-financing deal on the Robert De Niro actioner “Malavita” and “Three Days to Kill.”

Commercial banks, which have been unwilling to take on as little risk as possible since the financial crisis started, typically only do senior loans in the entertainment space, an arrangement that provides a lower rate but is reserved for transactions with a very low risk profile. Since the MESA deal harnesses institutional investors, some financial experts suggest the senior portion of Relativity’s deal might have been too risky for commercial banks.

Relativity has been on the hunt for new coin since last summer, when reports surfaced that Kavanaugh was in talks with JP Morgan Chase & Co. to buy out Elliott Management, the New York-based hedge fund that bought a minority share of Relativity in 2008. Sources close to the negotiations said then that they expected the deal to close as early as September. But the potential deal was met with skepticism from the financial and entertainment communities, and by November Variety first reported that those talks had stalled.

Burkle’s January investment severed most of Relativity’s connection to Elliott.

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