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The Fall of Relativity Media: Six Lessons Dealmakers Can Learn

How-to guides can be useful. But so can a good cautionary tale. No misfire dominated Hollywood headlines in 2015 like the unraveling and eventual bankruptcy of Relativity Media.

The 11-year-old creation of entrepreneur Ryan Kavanaugh flailed for months to try to find investors to remain afloat, before staggering into Chapter 11 on July 30, with nearly $1.2 billion in liabilities and assets with a book value of about $560 million.

For years observers had been predicting the demise of Kavanaugh’s venture, though the Relativity CEO continues to work through bankruptcy to assemble a capital structure so his company can emerge to make another round of films. On Nov. 18, the company filed a reorganization plan in U.S. Bankruptcy Court in Manhattan, saying it was in search of $100 million in new equity investment.

While Relativity’s failures and foibles might appear unique, others striving to make their own Hollywood deals could take away more than one lesson learned. Among them:

*History matters. While it forever will be portrayed as the land of reinvention, Hollywood is also the place that doesn’t forget. Kavanaugh, now 41, fashioned himself as the smart young man who created film slate deals with the studios. But some would never overlook the fact that his first big venture had been an investment fund that ran into the ground in 2002, after failed investments in several private companies. An arbitrator overseeing a lawsuit found Kavanaugh “clearly negligent” in the way he managed one client’s funds.

THE PERILS OF RYAN’S FLIGHT: Relativity crash offers cautionary tale about do’s and (mostly) don’ts of modern dealmaking Josh McKible for Variety

*Friendship and business don’t always mesh. Kavanaugh felt so close to Jason Beckman and Jason Colodne that he asked the pair to sign the ketubah (Jewish marriage contract) at his wedding. After Relativity collapsed, Kavanaugh would accused the duo, who run Colbeck Capital, of trying to steal his company by putting together their own financing package. The partners countered over the summer that the Relativity board and Kavanaugh had “fully authorized” their efforts. The investors and Kavanaugh split. More recently, a source close to Colbeck hinted the partners may be in forgiveness mode, saying: “They realize that Ryan’s comments at the time were based on emotion rather than fact and they’re rooting for him to be successful in his new venture.”

*Stick to what you know. Relativity appeared to be on an upward trajectory in its early years, when the firm was arranging financing for film slates at the big studios. But in 2010, Relativity began to make its own films. While Kavanaugh said he only needed to hit “singles” and “doubles” to make money, the studio never found enough consistent winners to give it a financial cushion.

*Leftovers don’t make a main course. Kavanaugh boasted of an algorithm he said helped Relativity avoid problem films, based on factors like genre, director and release date. But his competition said the mini-studio (computer modeling notwithstanding) often ended up with movies that the big studios did not want to make. There was a reason, the consensus goes, that the industry leaders left the future Relativity films on the table.

Dollar Landmarks
Relativity was never able to pull itself out of crushing indebtedness.
$1.2b Total liabilities when Relativity went into Chapter 11
$560m Total assets when Relativity went into Chapter 11
$100m equity investment Relativity said it was seeking upon filing for bankruptcy reorganization
$75m Amount of loan Relativity received from RKA Film Financing for release of “Masterminds,” Kidnap” and other films

*The money hustle never ends. Kavanaugh himself acknowledged that Relativity continually had to raise cash, unable to depend on a comfortable financial nest, like those afforded studios that are arms of major corporations. The Relativity CEO said the fundraising would continue until the business had enough cash flow from its film library to sustain new movies.

*Hold on to your best assets. Relativity had just begun to build a film library — a cash mainstay for most successful studio — when financial challenges forced it to sell that asset. The film collection went to Elliott Associates, the giant hedge fund, in 2012 and Relativity lost a critical cash stream that it could have used to produce future rounds of films, TV programs and other content.

*Spend it right. A finance firm said it loaned Relativity $75 million for the release of several films, including the heist caper comedy “Masterminds” and the Halle Barry thriller “Kidnap.” But RKA Film Financing said in a lawsuit that the studio diverted the money to other purposes, including salaries, bonuses and support of the company’s sports agency and television studio. Relativity hit back with a lawsuit, accusing RKA of a meritless attack designed to profit from the studio’s precarious financial position. The RKA lawsuit remains unresolved, but it contributed to a perception that Relativity did not follow through on its commitments.

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