Can Ryan Kavanaugh Really Pull Off a Relativity Reboot?

For someone who helped drive his company into the ground, Ryan Kavanaugh never seemed particularly chastened. He told an interviewer after his Relativity Media went into bankruptcy in July that it was nothing but a “hiccup,” which a simple reorganization would cure.

Never mind that bankrupt Relativity Media had let hundreds of millions of dollars in loans and bills go unpaid, and that the company had been taken over by senior lenders to be auctioned. Never mind that 75 employees had been laid off, and other top staffers — including co-presidents Tucker Tooley and Happy Walters, as well as chief financial officer Andrew Matthews — have left the company.

Maybe CEO Kavanaugh could be sanguine with reason. His 11th hour bargain-basement bid, backed by new investors, to buy back most of the company he founded, has considerable traction.

While Hollywood stood amazed that even such a relentless salesman could pull off another possible resurrection despite all the devastating fallout, it is clear the potential new arrangement makes a perverse kind of sense.

Kavanaugh could effectively start again because his company had fallen into such disrepute that no one in Hollywood had any interest in buying it, at least for more than a stalking horse offer of $250 million. Even the three hedge funds that made that offer backed down to a $125 million credit bid, and for Relativity Television alone.

That left the rest of Kavanaugh’s company — a struggling film studio, a music division, a school for fine arts and stakes in a distribution joint venture and a sports agency — essentially orphaned. The 40-year-old entrepreneur who pieced them together was the only one interested in bidding on the entire lot.

And though many in the entertainment industry wondered who would back a failure like Kavanaugh, there was an answer: those who had invested with his company, and lost, before.

Experts examining the deal in which the Kavanaugh group would pay $60 million and assume $30 million in debt said his financial partners must have figured that was their only way to avoid losses and write-offs: Double down, stay close, and hope to recoup some of your original investment, maybe more.

For the outsized Elliott Associates hedge fund, that amounted to $137 million in an unpaid loan already potentially lost. For VII Peaks Capital, at least $10 million in equity had gone into the red (with up to $62 million lost, when lumped in with the losses of an unnamed fellow investor, said one bankruptcy filing.) Joseph Nicholas, an investor who bought in to Relativity not long before the July 30 Chapter 11 filing, also had big money at stake, according to a Relativity insider, who declined to be named.

They all joined Kavanaugh and longtime Relativity investor Ron Burkle, the supermarket magnate and Kavanaugh friend, as backers of the offer for the bankrupt company.

U.S. bankruptcy Judge Michael Wiles has ratified the deal for Relativity Television and has signaled he will endorse a proposal to sell the rest of the company to the Kavanaugh-led group, praising the plan to “to preserve a business as a going concern.” A reorganization plan for the rest of the company, and emergence from Chapter 11, is not likely to be finalized until December or January.

Before Kavanaugh’s resurrection can be anything close to sealed, his group will have to come up with a plan, and millions of dollars of additional financing. That money will be used to continue operations until the company can emerge from Chapter 11, and presumably additional financing will have to be arranged to provide Relativity with working capital. More challenging could be overcoming the dozens of producers, distributors and other parties who have objected to their contracts going to a “new” Relativity, without their approval.

One objector called into question the sale of the TV unit, saying in an interview that bidding for Relativity Television was tamped down improperly, because interested parties felt they had to beat the $250 million stalking horse bid to secure just the TV production operation.

Kavanaugh could talk, as he did in a press release, about how he would “take the company to the next level,” and how Relativity would thrive as a “360-degree content engine.”

With the welter of creative content always looking for a home, his new Relativity might find some future partners. But it also will have to live in a community where many lenders, creatives and others have been burned by unpaid bills and unfulfilled promises. How many will want to go back for another ride on the Relativity roller-coaster?

After being little seen around his company’s Beverly Hills headquarters in the two months since the bankruptcy filing — including on the day of the layoffs, insiders said — Kavanaugh called a Monday afternoon staff meeting. There, the Relativity CEO tried to rally the troops and thanked them for sticking with the company during a difficult time.

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