Relativity in Ruins: Is it Too Late for Ryan Kavanaugh to Save His Studio?

Ryan Kavanaugh Relativity Bankruptcy
Max Vadukul/AUGUST

Hollywood’s latest evangelist blew into town without a film degree or a single production credit, but armed with abundant smarts, a knack for salesmanship and buckets of charm. Even Ryan Kavanaugh’s shock of red hair assured he got noticed in any room he entered.

Eleven years later, Relativity Media’s CEO stands on the brink of an inglorious retreat. His Beverly Hills-based company appears on the verge of bankruptcy, a key lender is calling him a “con man” and suing for fraud, and other creditors are pushing for the 40-year-old entrepreneur to be shown the door. While Kavanaugh scrambles to find a savior, the company’s 350 employees are preparing for the worst, with a Chapter 11 bankruptcy filing expected as early as this week.

Kavanaugh’s would-be Studio of the Future never fulfilled its brash leader’s promise: to harness clever financing and computer modeling to unlock the formula for winning films.

Sam Spratt for Variety

The aspiring mogul often gave off the impression that he knew better than everyone else. When he spoke of old Hollywood, he saw an antiquated ecosystem that badly needed new energy and ideas. He told a reporter in 2010 that he hoped to build Relativity into a company that would do nothing less than “fix inefficiencies in the market.” Instead, the young man from the San Fernando Valley made too many movies like “Paranoia” ($7.4 million domestic gross on a production budget of $35 million) and “Machine Gun Preacher” ($539,000 gross/$30 million budget) that kept his peers wondering how he managed to stay in business.

His horizons extended beyond picture-making. In short order, Kavanaugh dove into the television, digital and sports agency industries. He forged a partnership in China with Huaxia Film Distribution Co., launched a fashion business to much fanfare and little profit, and spun out big plans to build a film studio in Maui, the island paradise where he owns a home.

If Kavanaugh’s studio falls into bankruptcy, he will become the latest outsider ­— joining a line of entrepreneurs and iconoclasts that extends from Joseph Kennedy and Howard Hughes to Carolco’s Mario Kassar and MGM’s Giancarlo Parretti — to fall short of their promise as the entertainment industry’s next great visionary.

“There’s a constant stream of people who come in and say, ‘I’m going to revolutionize the business and put it on a sound basis,’ ” notes Howard Suber, former chair of UCLA’s film producers program. “But I don’t think anybody has changed it.”

For all his high-flying ways — the self-piloted helicopter commutes to and from his Malibu beach pad, the supermodel wife, the partying with Bradley Cooper and Leonardo DiCaprio — the Relativity impresario ultimately has been ensnared by his own outsized ambitions and the remorseless bottom line: Even in Hollywood, you have to pay your bills.

“For a while he had what looked like a good scientific approach,” says media analyst Harold Vogel. “But the debt was too high, and the dice dealer took away the dice. You can play Monte Carlo for a while. But if you only do average, that’s not enough.”

Kavanaugh has faced business failure and disgruntled investors before, as a young financial whiz who ran an investment fund into the ground more than a decade ago. But he also has demonstrated remarkable resilience. In 2011, giant hedge fund Elliott Management pulled out as Relativity’s principal backer, amid reports of tensions. That might have cast the fledgling studio adrift. Instead, Kavanaugh quickly cemented a deal with one-time supermarket magnate Ron Burkle, who stepped up with $350 million in debt and equity to renew Relativity’s fortunes. Burkle declined interview requests for this story.

“He never quits. He never stops. He never backs down,” says one of Kavanaugh’s earliest associates in the film business. “I would never bet against Ryan.” But Relativity’s prospects have become far more dire in recent months than those the company previously confronted. Despite protracted scrambling, Kavanaugh has been unable to repay loans totaling $320 million. He sought a year-long extension from creditors, but many would not budge.

The studio loses tens of millions of dollars annually, with most of the shortfall coming from its movie division, according to two individuals with knowledge of Relativity’s finances. A source close to the company denied that the film unit was the cause of the problem, saying that Relativity’s slate routinely has turned a profit, and blamed its startup ventures ­— from fashion to digital and advertising — for dragging down the bottom line. At the same time, the studio has struggled to come up with the funds to service its debt. Burkle and others may have rescued Relativity four years ago, but sources say that later cash injections into the company came with higher interest rates and more onerous terms.

Unlike its deep-pocketed rivals, Relativity has never scored the kind
of blockbuster success that could offset its box office losers.

With money running short, Relativity has been busy pushing back the release of several films, among them the summer comedy “Masterminds” and the Halle Berry thriller “Kidnap.” The cost savings in marketing and releasing dollars helps in the short run but, in turn, squeezes future cash flow. The longer Kavanaugh spins his wheels looking for fresh sources of capital, the deeper the hole he has to fill.

Staffers at Relativity, meanwhile, describe a feeling of being under siege. Some say they are unsure what projects to work on. Others tell of their embarrassment at fielding calls and emails from vendors angry about unpaid bills.

Some workers are looking to jump ship. Attempting to assure a measure of continuity, joint-venture partner EuropaCorp recently reached out to dozens of staffers it shares under a marketing and distribution agreement with Relativity to promise them that their jobs would be safe should the studio go bankrupt. (Under a previous agreement, EuropaCorp is prepared to absorb the joint venture if Relativity fails.)

More than a month ago, Relativity began to lose control over its own affairs, sources say. At the suggestion of lenders, the mini-studio installed financial services firm FTI Consulting to monitor funds. Insiders say the firm now approves all checks Relativity writes, though a source close to the company’s administration says FTI remains an adviser, not the final arbiter over bills.

In the cash-rich days before the Great Recession, Kavanaugh set up slate co-financing deals at Universal and Sony. The money came from Deutsche Bank, Citigroup and others, and there were enough hits provided by the two studios that both sides came out ahead. Kavanaugh impressed studio executives with his agile financial mind, and his ability to calculate the pluses and minuses — the risk and likely returns on a deal — seemingly on the fly.

“He brought new sources of revenue into our industry, and that is good,” says one executive, who declined to be named. “He made movies. He marketed movies and did everything to help the industry expand. You really don’t want to see companies like that go away.”

But, some outside investors who fronted the money for the slates charged that things did not work out nearly so well on their end of the deal. Discontent burst into public view in 2012, when a Cayman Islands-based hedge fund, Aramid Entertainment, sued Relativity, as well as Fortress Investment Group and others, saying that they prematurely dismantled a film slate deal at Sony, costing the offshore investment firm $44 million.

Aramid settled the case in December, when Relativity’s insurers agreed to pay $750,000 to trustees for the now-bankrupt investment fund. Aramid acknowledged at the time of the settlement that Fortress, not Relativity, was primarily responsible for the losses it suffered.

During the time he was engineering financing on behalf of the studios, Kavanaugh drew a $1 million payday and producer’s credit on many of the films (with some of those dollars folded back into the productions). But he wasn’t calling the creative shots then.

After convincing financiers to back his play as a mini-studio in 2010, he branched out on his own, and soon learned that picking winning movies was more challenging than lining up the funds to make them. “Immortals,” the 2011 sword-and-sandals epic, made $227 million globally — but only $83.5 million of that domestically, on a reported production budget of $75 million. (Relativity does not own international rights to films.) The margins were better on 2011 thriller “Limitless,” starring Cooper, which had a budget of just $27 million, and bagged $79.2 million domestic in a $162 million worldwide take. The studio also has helped fund some critically acclaimed pictures, like “The Fighter,” the gritty 2010 biopic that won supporting actor and supporting actress Oscars for Christian Bale and Melissa Leo. The film earned $93.6 million domestically.

But fashioning an overall slate that made money proved even more troublesome. An associate of Kavanaugh’s at the time says Relativity’s computer algorithm for selecting films was real. It fed in factors such as genre and previous performance of producers, directors and stars into a Monte Carlo-style simulation.

Though gushy press accounts depicted Kavanaugh’s “Moneyball” approach as an amazing innovation, the insider says the calculations weren’t so different from those being made by others putting together film slates. “And somewhere, there is a disclaimer,” notes the source, who declined to be named, “that says, ‘prior performance is not a guarantee of future success.’ ”

Relativity launched with the goal of making midbudget, broad-appeal films, but it hopscotched between genres, making movies that never reached blockbuster status, and developing a reputation for backing films that other studios passed on.

“By the time you pitch them, you probably shouldn’t be making the movie,” notes one producer.

As Relativity has struggled, better-funded competitors have moved into the midbudget market.

STX Entertainment is planning to spend more than $1 billion to make 15 films annually by 2017, while Broad Green Pictures also has big ambitions and upcoming movies with the likes of Terrence Malick, Robert Redford, and Andrew Garfield. The increased competition will make it even harder for Relativity to attract high-quality projects.

As a leader and administrator, Kavanaugh has struggled to set the tone for his staff. He could be a sensitive boss, and was quick, for example, to write a personal note of sympathy if an employee’s spouse or family member fell ill. Yet, he also suffered from a short attention span and an impulsive streak that left workers struggling to prioritize.

“It’s a cult of personality in every sense of that word,” remembers one former executive. “There is a day-to-day structure, ostensibly like you would find at a studio, but on any day, he will wake up and decide something interests him, and that will send everyone spinning, because what he says is law.”

Compounding its challenges, Relativity has struggled with turnover. Seasoned and independent-minded executives such as Steve Bertram and Michael Joe lasted only about a year in top jobs before leaving for new perches. In their place, Kavanaugh leaned on film chief Tucker Tooley, an amiable man whom current and former staffers fault for being more interested in keeping the peace than pushing back against Kavanaugh.

“Even when they’ve hired good executives, ultimately they weren’t empowered to do their jobs,” says another former staffer. “The quality of their product was left to a group of people who didn’t have a track record of producing many hits.”

A source close to Relativity rejects that description. “There is a strong management team there. They understand their jobs and do them well,” says the individual, who asked not to be named. “But it’s not the job of senior managers to fight with Ryan about the direction of the company. He is the CEO … It’s everybody else’s job to go execute his plan.”

Though the profits didn’t justify it, Kavanaugh spent lavishly. He outfitted a hangar in Santa Monica airport for offices and used a helicopter to commute from his Malibu home to the studio’s office on Beverly Blvd. Some of the bills he footed, others were reimbursed by the company, a source close to the company says.

Two sources confirm that some lenders are planning to look into whether Kavanaugh co-mingled business and personal funds, though a person close to the company says there has been no notice given of such an inquiry.

Even as financial clouds darkened overhead, Kavanaugh found it difficult to modulate his behavior. Last month, his wife, model Jessica Roffey, posted an Instagram photo of a new Mercedes she said Kavanaugh had purchased in honor of the upcoming birth of their child. It was a display of wealth that angered Relativity employees who were worried they were going to lose their jobs.

Kavanaugh seemed to balk at the social conventions that give most studio chiefs a more conservative affect. He relished friendships with A-list stars like DiCaprio and Gerard Butler, and didn’t shy away from being depicted as a playboy. “When you have money, great sex follows,” he told GQ India earlier this year.

Taj Stansberry

While many credit Kavanaugh as an entrepreneurial showman who for years defied the odds, they note that like many before him, he became drunk with power and fame, and didn’t have the financial means or a deep-pocketed corporate parent — and enough box office hits — to ultimately pull it off.

After remaining silent for much of the initial part of his most recent crisis, Kavanaugh has lashed out publicly in recent weeks. He accused one junior creditor, Colbeck Capital of New York, of trying to take control of his company, portrayed unnamed critics as waging “a malicious witch-hunt” against him and — in an online political screed — even denounced President Obama as being an adherent to the Communist Manifesto.

Given Kavanaugh’s initial reception by much of Hollywood, and glowing accounts in the press, there was a time when the specter of his venture teetering on the brink of insolvency may have seemed unlikely. But even before he came to the entertainment industry, his early history reveals a young man who took big risks and suffered big falls.

Kavanaugh’s father, Jack, an eye surgeon and entrepreneur joined his son in a series of new ventures. Ryan had barely left UCLA (without a degree, though press accounts said he at times claimed to have one) when he started an investment fund. (He later completed his course work and earned a bachelor’s degree.) He got a number of family friends to trust him with their money, including crisis PR maven Michael Sitrick and producers Jon Peters and Mark Canton, and former William Morris Agency CEO Jim Wiatt.

The younger Kavanaugh sunk much of the money into start-ups that by the end of 2002 were all but worthless. Several investors sued, accusing Kavanaugh of fraud, misrepresentation and other wrongdoing, according to a Los Angeles Times report on the litigation. Two of the cases settled without any admission of wrongdoing, but a third, filed by Sitrick, went to an arbitrator.

The arbitrator found in 2002 that Kavanaugh, who managed more than $6 million of Sitrick’s money, had been “clearly negligent” in putting the money into private investments rather than public stock, as he had promised, and ordered damages of $7.6 million, though Kavanaugh said he was essentially bankrupt and could not pay. There was continuing litigation and an attempt to get an insurance company to cover the ruling, but Kavanaugh never had to pay.

Sitrick declined to comment about the dispute. In previous statements about the case, Kavanaugh depicted himself as the victor, because courts ruled against the PR man’s attempts to collect. (The two sides had agreed that Sitrick would not collect the damage award unless he could prove Kavanaugh’s net worth was more than $100,000 at the time of the decision. Sitrick tried, but could not prove the young entrepreneur met that threshold in 2002.)

Such a devastating failure might have crushed others. Not Kavanaugh. He turned to options trading, but lost out there too, according to published reports. He then set his sights on the entertainment business, where studios were always looking for new sources of funds to help defray risk. According to one former associate, a crucial moment for Kavanaugh arrived in 2005, when he helped Marvel Studios — which had only licensed its comicbook content to outside studios at that point — to obtain financing to help make its own pictures, including “Iron Man” and the other blockbusters that followed.

“Nobody knew he could do that, and he did it,” says the one-time ally. “That is where the thought of starting Relativity came. The Marvel deal got him credibility, and got him going again.”

If the company avoids or emerges from bankruptcy, its future remains murky. Should it sell itself, it’s not clear what a potential buyer would nab. Relativity has no film franchises and a limited library of titles dating back just a few years. The Elliott Management hedge fund took control of the bulk of the film titles when the two split ­— costing Relativity as much as $450 million annually in potential revenues, contends an individual close to the company. The distribution and marketing joint venture it controls with EuropaCorp, the French film company behind the “Taken” and “Transporter” series and the global hit “Lucy,” is seen as a valuable asset. EuropaCorp agreed to pay $80 million for a 50% stake in the venture.

Relativity’s television operations are believed to be profitable, with company management touting dozens of projects in active production and development, including 29 series (among them “Home Free” at Fox and “Catfish: The TV Show” at MTV) and another 46 pilots and presentations in the works. But the operations rely heavily on reality shows, which are less lucrative than network dramas and comedies.

The company’s sports representation business has been on the upswing, but Relativity owns just a 30% stake in the agency.

The problem is that there are so many parties that must be paid off — from investors to debt-holders to vendors — that, in the words of one film industry executive, “There are a lot of palms to grease.”

On the film side of the ledger, Relativity does boast lucrative foreign output deals and a pact with Netflix that is said to be among the most generous in the business. Because Relativity negotiated its initial pact with Netflix at a time when the streaming giant was desperate for Hollywood content to showcase on its burgeoning video network, it receives compensation that rivals what major studios earn from premium cable networks like HBO and Showtime. But that Netflix deal is set to expire in 2018, and it’s doubtful the new terms would be nearly as favorable.

Most industry observers think that Kavanaugh will be forced to relinquish control of his company, but some caution that he’s been written off before, only to talk his way into yet another deal.

But at some point, the man who promised to use math to take the risk out of moviemaking may have to concede that the numbers no longer add up.