An investor group backing Ryan Kavanaugh that includes supermarket magnate Ron Burkle, a subsidiary of the Elliott Associates hedge fund, and an obscure San Francisco Bay Area investment house are continuing to press their bid to purchase all but the TV operations of bankrupt Relativity Media, in a protracted auction that has no certain end point, according to two sources familiar with the situation.
If successful, it would keep the 40-year-old entrepreneur in the thick of the multimedia concern’s operations — and would mark a bizarre turn of events for the man who would be buying back most of the company he had helped bankrupt. The investors are offering an unknown amount to acquire filmmaker Relativity Studios, a 25% share of sports agency Relativity Sports, an interest in a distribution joint venture, and Relativity Education, which runs a for-profit school for the fine arts, several sources said.
The proposed deal, which still must clear many hurdles and secure the approval of a U.S. Bankruptcy Court judge, would not include Relativity Television. The Beverly Hills-based company’s TV unit would presumably go to a trio of investment funds — Luxor Capital, Anchorage Capital and Falcon Investment Advisors — which are senior lenders to Relativity and have been driving the bankruptcy auction. They made a $250 million stalking horse offer for all of Relativity which has not been topped.
Negotiations at the offices of Blackstone & Company in New York stretched from Thursday morning to nearly dawn Friday. The bankers, lawyers and advisors for the sale and interested parties then took a break for a few hours, before resuming talks later Friday morning, according to a source close to the deal. With the Kavanaugh group now in the mix, there was no obvious end point for discussions. Two participants said it was possible the ongoing discussions would even force a postponement of Monday’s scheduled sales hearing before U.S. Bankruptcy Court Judge Michael Wiles.
The Anchorage-Luxor-Falcon hedge fund group had been presumed the heir apparent for ownership of Relativity since its August stalking horse offer. That would have put the investment group in charge of a company founded 11 years ago by Kavanaugh, a flamboyant finance wiz who has repeatedly defied predictions of his entertainment company’s imminent collapse.
What had been a ho-hum auction, with only a few offers for Relativity’s television operations and little other interest, suddenly became complicated when Kavanaugh flew to New York this week to personally deliver the bid for the bulk of Relativity.
The Anchorage-Falcon-Luxor bidding alliance has little interest in continuing to operate most of Relativity, said a source following the bidding closely. The hedge funds could be willing to hold on to the television unit and let the rest of the subsidiaries go, as long as Kavanaugh’s group can prove that it has the resources to complete the deal and then to fund ongoing operations — particularly of the struggling movie studio, which has produced a series of flops such as “Out of the Furnace” and “The Best of Me,” the source said.
Variety first reported the involvement of Burkle late Thursday, but the Los Angeles-based magnate’s representatives have not responded to repeated requests for comment. Teaming with Burkle and Kavanaugh could be Manchester Securities, a subsidiary of Elliott Associates, the huge hedge fund that is owed $137 million for its previous investment in Relativity, the source said. Another potential partner, that person said, would be VII Peaks Capital of Orinda, Calif.
An individual familiar with the situation said that Elliott and VII Peaks apparently have concluded that their investments could be lost, unless they can help prop up operations at Relativity, in the hopes of turning the company around and generating positive cash flow. That has made the would-be partners, already losers in earlier involvement with Relativity, willing to re-up, in hopes that the recapitalized company can make them at least partially whole, the insider explained. Neither of the firms could be reached immediately for comment.
Even if a sale is approved next week, legal challenges remain. Dozens of disgruntled companies, producers, and other players have objected to their contracts being assumed by Relativity’s next owner without their approval. That includes Netflix, which streams the studio’s films, and Europacorp, which invests in a distribution and marketing joint venture.
Anchorage in particular has wanted to hang on to the TV company. The debt holders believe that with some investment the company can be built up as a strong indie at a time when demand for TV content is exploding. Relativity Television has been starved for investment as most of its cash flow has gone to help shore up the parent company.
Despite speculation, all of the existing TV projects, scripted and unscripted, will be included with the TV company, including the CBS drama “Limitless,” MTV’s “Catfish” and a handful of development prospects. Kavanaugh’s side of Relativity will have a participation stake in projects derived from Relativity film titles.
If the separation is finalized by the court, the lender group will have to make new deals with Relativity Television’s management team lead by president Tom Forman. In the due diligence process, the lenders came to realize that the TV side had been under-capitalized but still managed to deliver earnings, so the hope is that with investment it has growth potential. The talk of merging Relativity TV with MGM, in which Anchorage also has a stake, is seen as remote in the short-term because the both entities have other equity owners in addition to Anchorage that do not overlap.
Relativity observers expressed surprise that investors that Kavanaugh has battled in the past would return to help him reclaim the company, sans TV division.
“Bankruptcy makes strange bedfellows,” said a person close to the situation.