Relativity Media’s bankruptcy this summer left nearly 150 creditors hoping to get paid and the future of the studio behind “Limitless” and “Act of Valor” hanging in the balance.
There have been legal filings and lawsuits over unpaid bills, fights over the release of upcoming films, such as the Zach Galifianakis comedy “Masterminds” and the Halle Berry thriller “Kidnapped,” and questions about who will buy the financially distressed company in a planned October auction. The high-profile failure has inspired a flood of stories about the management of Relativity and its controversial founder Ryan Kavanaugh.
In an exclusive interview with Variety, Brian Kushner, the FTI Consulting senior managing director who was appointed the studio’s chief restructuring officer, and C.J. Brown, the Blackstone senior managing director who is serving as Relativity’s investment banker leading its auction, expressed confidence that the media attention will boost interest in the studio. The company already has a $250 million stalking horse bid from a group of investors that includes such financial firms as Anchorage, Luxor Capital and Falcon Investments.
In addition to previewing the auction, Kushner and Brown praised Kavanaugh’s “extraordinary vision” for making Relativity into a new kind of multimedia company, with interests in film, television and new media. While creditors have raised questions about lavish spending by the executive, the bankruptcy officials praised Kavanaugh, saying he had agreed to go without a salary during Chapter 11.
How much interest are you expecting in Relativity?
C.J. Brown: There’s a lot of excitement. We’ve been reaching out to many individuals. We’ve contacted nearly 150 parties, split pretty evenly between strategic investors and financial institutions. Of those nearly 50 have signed [non-disclosure agreements]. It’s still early days, and it’s August and a lot of people are on vacation, so we expect those numbers will grow significantly.
Who are some of the potential bidders? Do you have a sense of how many people who signed NDAs are actually interested in bidding?
C.J. Brown: I can’t give you specific names. It would go against protocol, but it’s large institutions on both the strategic and financial side.
We normally get a sense of the depth of interest based on how much time people are spending in our data room. Based on that and the number of follow-up questions and their willingness to schedule management presentations, our sense is people are serious. We’re doing a fair amount of work to get a high turnout.
Given that Relativity has liabilities of almost $1.2 billion, there may not be enough money to pay everyone back after a sale happens. How will you determine who gets paid first?
C.J. Brown: The way it will work is that in the event the auction process results in a purchase price that’s in excess of the stalking horse bid, then all value would flow through a waterfall paying in order of priority any administrative expenses, the [debtor-in-possession] loan, the term loan a, the term loan b and the proceeds would flow through the rest.
How was the $250 million figure determined for the stalking horse bid?
Brian Kushner: We had talks with a number of different organizations in terms of providing debtor-in-possession financing and the only interest we had and the only real bid we had was from the stalking horse bidder. They offered up $250 million. That was the bid that they determined and there was nothing else to compete against. It was our only choice.
Do you have any sense of whether or not that was a reasonable valuation?
C.J. Brown: If it was overpriced, I don’t think I’d be able to cite the numbers back to you that I just did in terms of how many other people are interested in the company. If that number was way out of the ballpark, I don’t think we’d have this amount of people wasting their time looking.
Who is running the studio while it is in bankruptcy?
Brian Kushner: Right now the governance of the company is led by the board of directors who are involved in all material decisions. On a day-to-day basis, Tom Forman and Andrew Marcus are overseeing TV, and Tucker Tooley is running all the daily activities of the film business. All financial activities and approvals run through me, and I do call Ryan often to discuss and review certain items.
There’s been a lot of media attention, some of it negative, surrounding the bankruptcy. What impact will that have on a sale?
C.J. Brown: I think it will help get more people to be aware of our situation. People will make their own decisions, but the exposure we’re getting shows that this is still a world-class film and TV business that did a lot of impressive things with making film assets into TV shows, as they did with “Limitless” and “Catfish.”
Do you think there’s an attractive business here even though the company filed for bankruptcy?
Brian Kushner: Ryan Kavanaugh had an extraordinary vision. It’s unfortunate that the company had the amount of debt it did and was leveraged as it was. But his vision of being able to find synergies between his film and television businesses was an impressive one, and there are going to be bidders who want to take advantage of those synergies and take it to the next level. We’re expecting an exciting bidding process and a lively auction.
Do you expect a buyer will want Ryan to remain involved in the business?
Brian Kushner: It is going to be bidder specific. I’m sure that will be based on discussions between the management teams and Ryan to see if it’s something he’d like to participate in and be involved in and that they need.
C.J. Brown: Many of the investors we’ve been speaking with believe Ryan has an extraordinary vision and ability to make these businesses work seamlessly, and many would love to have him involved.
There was recently a motion to provide financial incentives to key staffers to keep them involved through the bankruptcy. Why was that necessary and why wasn’t Ryan included in that pool?
Brian Kushner: There’s been a lot of media attention focused on the company and on Ryan personally, and he voluntarily agreed to take compensation of a dollar and no more. He thought it was the best thing for the company and for the process to eliminate questions concerning himself. He felt it would be inappropriate to participate in a retention program. Frankly, I wish more founders and CEOs would do selfless acts like that. I can’t stress enough how unique that is.
In the case of other employees and key personnel, this is a common tool to utilize in bankruptcy court proceedings. It helps maintain continuity and many of these employees are taking on extra work and this allows us to compensate them for that additional activity.
Do you think the company is more likely to be sold in pieces or in its entirety?
C.J. Brown: We believe in what Ryan created. We think the businesses work well together, and there are indeed synergies that help the creative process and that we’d do well if it were sold in its entirety.
Creditors have criticized this bankruptcy process as being too fast. Why was speed important?
C.J. Brown: A common refrain we hear from people is the belief that more time allows for a more valuable sales process. But it’s not clear that if there is more time in the auction process, more potential buyers will emerge. We’re going to reach out to as many people as possible, and we don’t believe that the process will be harmed by the pace.
What is the status of the four unreleased films given that RKA Film Financing has sued over and claims it has liens on?
Brian Kushner: We’re working together to come up with a business arrangement that will facilitate our ability to release those films with the correct level of supporting print and advertising. Whether we do that in collaboration with them or if they’re sold to a third party is a question for the future. In the case of the stalking horse bidder, they are not purchasing those movies. They are part of the excluded assets under that asset purchase agreement.
Those claims contain allegations of fraud. Will Ryan be deposed?
Brain Kushner: I can’t speak to extant litigation. As part of the legal discovery process in every bankruptcy, people are able to serve notice of depositions on individuals at any time. Having a founder or CEO being deposed is not out of the ordinary and it could happen in the event of litigation, but I’m not aware of Ryan being deposed.
How difficult is this bankruptcy compared to others you’ve worked on?
C.J. Brown: Because of the sheer number of debtors there are complexities, but it’s not Lehman Bros.