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Lenders Could Have Taken Over Ryan Kavanaugh’s Relativity Media, Expert Says

The company that took over many of bankrupt Relativity Media’s financial functions and prepared it for a recently approved reorganization filed a new declaration Wednesday, supporting its argument that it is owed more than $5 million in fees.

Financial adviser Robert S. Solomon argued that, without the intervention of FTI Consulting, Relativity could very easily have been taken over by senior lenders, who instead agreed to a plan under which they bought the company’s TV unit and allowed company founder Ryan Kavanaugh to reorganize around his film studio.

Senior lenders Anchorage Capital, Luxor Capital and Falcon Investment Advisers made a stalking horse bid of $250 million in Relativity’s fall Chapter 11 auction. With no other bidders for the company, the three lenders (which, together, were owed more than $360 million) “could well have proceeded with auction as initially proposed and taken all of the Debtors’ assets in exchange for [their] original bid,” Solomon said.

The adviser from the firm of Zolfo Cooper was initially hired by those three investment funds to help them as they laid plans to auction off Relativity. When the auction for the whole company went bust, the lenders transitioned to a combination auction/reorganization proposal. They successfully bid $125 million for Relativity’s TV operation — effectively forgiving part of the money the company owed them.

Solomon helped smooth the way for that deal and then became “interim senior officer” overseeing Relativity Television for the three investment houses. The television outfit has been renamed Critical Content, with Relativity TV’s previous leader, Tom Forman, remaining in place as CEO.

U.S. Bankruptcy Court Judge Michael Wiles has approved Relativity’s emergence from bankruptcy, even though the company did not fulfill some of its earlier pledges. Kavanaugh failed in his announced hiring of Academy Award-winning actor Kevin Spacey to be the studio’s new chairman, though Spacey’s producing partner Dana Brunetti still intends to become chief executive of Relativity Studios. And Kavanaugh failed to land a promised $100 million in new equity commitments (taking on new loans, instead) saying that fresh cash infusions would come after the studio’s relaunch.

The fee dispute between FTI and Relativity has dragged on for months. In January Judge Wiles sided with FTI, saying Relativity should pay billings that already amounted to $4 million, total. Wiles ruled that Relativity had not filed its objection in a timely way.

In its previous declarations, FTI’s executives have depicted Kavanaugh as an obstructionist, who got in their way as they tried to operate Relativity more efficiently and who had a grandiose view of the value of his company. Kavanaugh and his company declined comment Wednesday. They previously accused FTI of overstepping its authority and excluding the CEO and his board from important decisions. He said the company’s future prospects were harmed by FTI’s actions.

Solomon’s view of the bankruptcy, from his front row seat as the senior lenders’ adviser, hews closely to the FTI version. According to Solomon: FTI, led by chief restructuring officer Brian Kushner, arrived at a company in “free-fall,” with employees fleeing and the business in “disarray.” “Books and records were months behind in being posted,” Solomon reported, “and were maintained on a cash basis without the supporting documentation one could normally rely upon to manage liquidity, such as accounts receivable and accounts payable aging reports.”

Rejecting Kavanaugh’s assertion that FTI spent too much, Solomon said the consulting firm needed its own professionals to help put Relativity back on an even keel.

“The Debtors’ business was a ‘melting ice cube,’ and if a sale had not been consummated expeditiously, there might not have been any value at all available for distributions,” Solomon wrote. FTI helped Relativity “in bridging the gap between chaos and stability by bringing in its own talented and dedicated employees to assume the functions of the former Debtor employees.”

In the longer term, FTI created a runway for most of the positive outcomes to follow, Solomon added, saying the consultancy “set the stage for the sale of the TV business as a going concern, the Debtors’ return to the business of making and distributing films, and the Debtors embarking upon a chapter 11 plan process that has yielded a confirmed plan expected to be consummated very soon.”

Kavanaugh, 41, has previously given a strikingly different account. In his opinion, FTI focused on propping up the TV business at the expense of all Relativity’s other operations — principally its film studio, but also a fashion consultancy. Those failures meant that untold riches were left on the table by the FTI reorganization team, the Relativity founder has said.

A hearing on FTI’s fees, once set for March 31, has been postponed until April 21.

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