With No Bids for Relativity as a Whole, Company Likely to Go to Senior Lenders

Ryan Kavanaugh Relativity
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No company or individual stepped forward to make an offer for all of bankrupt Relativity Media by Friday’s deadline for bids, according to a source familiar with the situation. With bids coming in only for pieces of the failed company by day’s end, experts said they expected that senior lenders who previously made a $250 million stalking horse bid would retain control of the 11-year-old maker of films and TV shows.

That does not mean that the next iteration of the company founded by Ryan Kavanaugh will become clear any time soon. There are still objections to the bidding process and there’s a possibility that the senior lenders might resell some or all of the company, if their bankruptcy bid prevails.

“Usually these folks are ultimately looking to sell the business,” said Brian Davidoff, a bankruptcy attorney with Greenberg Glusker. “They’re not in this thing for the long term. Once they have a distressed asset that no longer has the taint of bankruptcy, they try to create value and sell again.”

And then there is the litigation — one lawsuit already filed accuses Kavanaugh of fraud for allegedly misdirecting money intended to release movies. Many more suits could be coming, experts say, from the dozens of creditors who are likely to get nothing out of the sale.

Any companies or individuals who made an offer for Relativity by the deadline at noon (ET) on Friday will be informed Monday by sale manager Blackstone & Company whether their bids are considered legitimate. The contenders will also be informed of other parties vying for some or all of the company. If there are competing bids, an auction will be held on Oct. 1.

Only after the auction will results of the bidding be made public. U.S. Bankruptcy Court Judge Michael Wiles has set Oct. 5 for a hearing and his judgment of whether to validate the results of the sale.

An individual familiar with Relativity’s operations said that more than 20 potential bidders had emerged in preliminary rounds of the auction process, though it was unclear how many of them made formal offers by Friday’s deadline. Interest was said to be most intense for the company’s television operation, which produced the new CBS series “Limitless,” the hit MTV program “Catfish: The TV Show” and other reality shows.

A report from one of Relativity’s investors last year put the value of the company’s TV operation at $92 million to $118 million, although the assessment provided no detail on the reasoning behind that valuation.

With bidders interested mostly in the TV operation, experts who have examined the sale say it is hard to imagine how bidders — even collectively — would create more value than the $250 million stalking horse offer. That bid comes from Anchorage Capital, Luxor Capital and Falcon Investment Advisors — all part of a senior lending group that is owed more than $360 million by Relativity.

Relativity has reported total liabilities of nearly $1.2 billion and assets of $560 million. Most of those who invested, or are owed money by Relativity, could be left with nothing after the auction. Elliott Associates, the giant New York hedge fund, is struggling to recoup any of the $137 million it is owed. Equity investors, including a group led by Steve Mnuchin and Twin Peaks Capital of the San Francisco Bay Area, stand to lose tens of millions. And unsecured vendors were owed $89.9 million at the time of the July 30 bankruptcy filing.

“In order to sell the company in parts, you would have to make the argument that the price you’d get by selling it piecemeal is better than selling it all at once,” said Jude Gorman, general counsel at Reorg Research, a firm that analyzes companies with distressed debt. The victorious bid is not always the one that offers top dollar. Instead, the successful new owner could be “the one with the most reliability or the greatest probability of closing,” said Graham Meharg, an analyst at Reorg.

An individual who knows Kavanaugh said the Relativity CEO would likely try to remain engaged in the company, perhaps by finding partners to make his own counter-offer. Kavanaugh, 40, has said nothing publicly about his intentions. “He will never, ever quit trying to keep hold of the company, until every option is exhausted,” said the individual, who declined to be named discussing confidential conversations.

Presuming the big lenders end up in control of the company, two experts following the situation closely said they expect that individual development projects — particularly for films — could be sold off. Dozens of companies filed objections in recent days in the bankruptcy court to their projects being passed on to a new owner.

“All bankruptcies are unique, but this one has raised more objections than you typically see,” said Davidoff.

Many of the film and TV producers argued that Relativity’s failures should leave them free to pursue new partners, without any obligations to the studio. RKA Film Financing, the lender that sued Kavanaugh for fraud and called him a “con man” wants to take four films out of the hands of Relativity. Only by getting another company to release “Masterminds,” “Somnia,” “Disappointments Room” and “Kidnap” can RKA begin to recoup some of the $85 million it is owed by Relativity, the lender has argued. (Kavanaugh has countersued RKA, saying it went after him in an attempt to take advantage of Relativity’s precarious financial situation.)

That fight could be just the start of a web of litigation, several lawyers following the case said.

“If creditors get nothing or something slight, they will look for avenues to pursue to provide for distributions on their claims,” said Robbin Itkin, a bankruptcy expert at Liner LLP. “It is a cost/benefit analysis. Is the cost of pursuing [litigation] justified by the probability of recovery, and of how much?”

Kavanaugh has suggested in past statements that he believed one investor, Colbeck Capital, tried to take advantage of its insider status to seize control of his company.

Various Relativity investors could challenge how funds were spent at the company. RKA already suggested money for P&A went to other uses. In a new bankruptcy filing just this week, a South Bay Mercedes dealer said Kavanaugh’s company had fallen behind on its $3,500 monthly payments on a Mercedes SLSR that retails for more than $220,000 when new. With the three-year-old lease now in default, the car dealer wants the entire balance on the 48-month lease, or $132,000.

A lawyer for Kavanaugh filed a response, saying that a Mercedes unit trying to collect the money had incorrectly cited Kavanaugh as responsible for the lease, when, in fact, it was Relativity that leased the car. The Kavanaugh lawyer said lawyers for Mercedes had agreed to refile their legal papers to correct the “inconsistencies.”

That did nothing to mollify a lawyer for one Relativity creditor. “What is a company that is in financial distress doing renting a $200,000 sports car? It’s just not right,” said the lawyer, who declined to be named because his client had not authorized him to speak. The lawyer said that such lavish spending will likely be the subject of a future audit, and perhaps litigation, by the legion of unhappy Relativity creditors.

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