Post-Bankruptcy, Relativity Seems Stuck in Limbo

Not long before Ryan Kavanaugh’s Relativity Media won its release from bankruptcy in April, the ebullient CEO said he would now be leading a “well-capitalized media company that is well positioned for growth and success.” His financial adviser, from the firm of Houlihan Lokey, predicted the reborn Relativity would attract a “feeding frenzy” of new investment.

Kavanaugh’s company did shed a mountain of debt, and many employees, during its eight months under Chapter 11 protection. But today, the Beverly Hills-based entertainment concern finds itself with many of the same challenges that dogged it even before it was forced to seek bankruptcy protection a year ago. It’s still struggling to attract new investment and now has released its grip on a pair of key film distribution deals.

Relativity needed senior creditors to agree at the end of June to extend the date for the company to make a $30 million debt payment, say several sources familiar with the situation. The payment is just part of the $57.8 million the company projected it would repay this year, according to a bankruptcy court filing. It’s yet to be made public where Relativity will find the funds to allow it to meet those obligations.

One individual close to the company offered assurances that a solution is just around the corner, with an infusion of new equity likely to be announced this week. And Kavanaugh said in a statement last week:  “We have concluded an agreement with a large strategic partner involving new equity.” The company declined to provide details of the plan to repay the $30 million debt, which was first reported by the Wall Street Journal.

Relativity’s travails come nearly a year after it filed for bankruptcy protection, listing $1.2 billion in liabilities and assets with a book value of $560 million. Though Kavanaugh had touted a formula for defraying costs and utilizing an algorithm to avoid cinematic bombs, his company had its share of screen losers – including the Liam Hemsworth thriller “Paranoia,” and “Machine Gun Preacher,” with Gerard Butler as a one-time biker who rescues child soldiers.

The company did not come up with the $100 million in new equity investment it initially promised U.S. Bankruptcy Court Judge Michael Wiles that it would obtain before exiting Chapter 11. Instead, Relativity secured two loans for a total of $75 million – one from Midcap Financial Trust and the other from Kavanaugh’s co-chief executive, Chicago investor Joseph Nicholas. The loans were part of a financial plan substantial enough to persuade Wiles to approve the  company’s reorganization plan in March.

Wiles’ approval came despite the fact that the company also delivered only half of the highly-touted new management team it said would lead it to a more profitable future. Producer Dana Brunetti agreed to head the Relativity film division, but his long-time producing partner, Oscar-winning actor Kevin Spacey, bowed out.

Despite those challenges and the struggles of many film companies, Relativity projected a remarkable comeback –its bankruptcy court filings anticipated that all 22 of the films it planned to release over the next three years would be profitable.

But a couple of those highly-touted projects are now headed to other distributors. Relativity said it simply passed on distributing the two films — “Hunter Killer” and “Den of Thieves” — by choice. But others familiar with the projects question whether Kavanaugh’s company had the financial means to market and release the movies.

Since May, the mini-studio has had a prospectus out to potential investors, seeking to raise up to $150 million and valuing Relativity at $500 million. But, since then, the company and its financial advisers have not announced any new investors.

“Hunter Killer” – produced by Neal Moritz and starring Gerard Butler, along with Gary Oldham and Common – became the object of a fierce dispute during Relativity’s bankruptcy. Moritz and others associated with the film sued, saying that Relativity had fraudulently induced them into a deal to distribute the film, though they knew their financially-fragile company was “nothing more than a house of cards.” Relativity rejected the allegations as “baseless and patently false.” By the end of the year, the two sides had settled, with Moritz saying it had all been a “misunderstanding.”

Relativity was required by the legal settlement to to come up with an $8 million “guarantee payment” to demonstrate its intent to proceed with the distribution deal. But the company had not made that payment by a May 31 deadline.

The plight of the film – set to begin shooting July 25 in London — is particularly notable because of Kavanaugh’s long friendship with Butler and the emphasis the entrepreneur put on the picture after last year’s settlement.  Kavanaugh issued a statement at the time describing Butler as “a close friend” and calling the project  “yet another step forward for Relativity in its new iteration.”

Although the distribution agreement was viewed as the central, potentially profit-making, aspect of the “Hunter Killer” deal, Relativity in recent days has downplayed the fact it is not releasing the film and focused, instead, on what it said was its continuing role in producing “Hunter Killer.” “Relativity could not be more excited to be co-producing ‘Hunter Killer’ with Millennium Films,” said a statement from Relativity. The company went on to praise its own  “new creative team,” concluding, “It is exciting to see this finally coming to fruition.”

“Hunter Killer” is the second distribution deal for a Butler-starrer to depart Relativity in the aftermath of the bankruptcy.  In June, it was announced that the crime thriller “Den of Thieves” would leave Kavanaugh’s studio, to be distributed by STX. Two individuals familiar with that deal said they believed that Relativity gave up the film because it could not afford to release the picture, directed by Christian Gudegast.

Relativity acknowledged on Friday that it had received $1.2 million when it released the rights to the project to STX. An individual close  to Relativity rejected the suggestion it could not afford to be involved with “Den of Thieves.” Relativity’s spokesperson said the sale of the distribution rights was part of the company’s bankruptcy exit strategy. The company subsequently issued a press release, saying: “We are pleased to continue to meet the milestones set forth in the exit with the court, and this was a significant step in meeting those objectives.”

Relativity in the past has depicted its critics as having petty jealousies or ulterior motives. After Variety‘s inquiries last week, one of two company press releases called its bankruptcy exit plan “robust” and gave a list of various Relativity investors, concluding that “the current owners have invested more than $200 million into Relativity.”

The company has said that it has not retreated at all from its plans to be a fully-functioning film studio. It said it is prepared to proceed with the release of four films later this year, beginning Sept. 9 with the Kate Bosworth horror flick “Before I Wake.” The Zach Galifianakis, Kristen Wiig caper comedy “Masterminds” is set to follow, on September 30. The haunted-attic picture, “The Disappointments Room,” is supposed to hit theaters Nov. 18. It stars Kate Beckinsale, Lucas Till and Gerald McRaney. Relativity plans to end the year with the Dec. 2 release of “Kidnap,” a thriller starring Halle Berry and directed by Luis Prieto.

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