If Ryan Kavanaugh’s Relativity Is Up for Sale, Again, Who’s Buying?

Why a Relativity Sale Looks Unlikely
Photo by Buckner/Variety/REX/Shutterstock

UPDATED: No one ever accused Ryan of being a bad salesman.

The entrepreneur and his team from Relativity Media put on quite a show last spring for U.S. Bankruptcy Court Judge Michael Wiles.

They showed the New York judge bits of upcoming Relativity films, such as Kristen Wiig’s caper pic, “Masterminds,” currently in release, and Halle Berry’s upcoming thriller, “Kidnap.” They offered video testimony from Oscar-winning actor Kevin Spacey, who declared himself “enormously challenged and excited to ‎become chairman of Relativity Studios.” They presented the judge with fresh fiscal blood — Chicago investor Joseph Nicholas, who promised that he would pump his own millions into the failed studio, with others sure to follow suit. Indeed, Kavanaugh’s film finance expert, Marni Wieshofer, of Houlihan Lokey Capital, assured the court there would be a “feeding frenzy” of new cash for Relativity, once the company cleared Chapter 11.

Less than seven months later, those promises sound like so many earlier vows from Kavanaugh, who launched his company in 2004 with assurances of  fail-safe financing and sure-fire hits. Today, his vaunted Relativity Media appears on the brink of disappearing. Nicholas left his position as Co-CEO late last week, after dumping $80 million or more into the struggling company, according to individuals close to Relativity. And someone from Kavanaugh’s camp, or perhaps the CEO himself, suggested to the press that the company was for sale, though its unclear if any potential suitors will surface.

The company as a whole did not attract a single bidder when it went on the auction block in September, 2015. And little has happened since then to assure would-be buyers that Relativity is on the path to resurrection.

“The company never should have been allowed to emerge from Chapter 11,” said an individual close to Relativity, who asked not to be named, to maintain a tenuous relationship with Kavanaugh. “The judge approved the reorganization plan and now, just a few months later, it looks like they are effectively liquidating.”

If Kavanaugh made a reputation for anything over a couple of decades in an around Hollywood, it’s for resiliency and 11th-hour resurrections. Some who are close to him say he can never be counted out, as he was before he arranged to reorganize his company and emerged from Chapter 11 protection in April. But, this time, industry insiders and those familiar with entertainment finance say it appears there is little likelihood that the company behind films such as “The Immortals,” “Limitless” and “Act of Valor” will emerge in yet another iteration.

Kavanaugh and his team had suggested as Relativity emerged from bankruptcy that the company could survive by piecing together enough financing to release its slate or previously-finished films. But the debut of “The Disappointments Room” (a $15 million horror flick starring Kate Bekinsale) to just $1.4 million in early September marked an inauspicious bow for the “remade” Relativity.

Then, last weekend, hopes turned even bleaker, when Relativity’s heist caper flick, “Masterminds,” with Owen Wilson and Zach Galifianakis, staggered on its opening weekend. The anemic $6.5 million debut doesn’t go nearly far enough toward the film even recouping its P&A and other costs once pegged at $78 million. It also falls several decimal points shy of the $130 million lifetime take Relativity had once projected.

“‘Masterminds’ was the final shot for a resurrection. When I saw it did just $6.5, that was it,” said the source close to the company. “I thought, ‘the company’s gone.’ “

Though a spokesperson, Relativity declined to comment.

Stories have been floated in the trade press in recent days about Kavanaugh’s intention to sell. One report speculated that Chinese investors — possibly media giants like Dalian Wanda and Alibaba — might be interested in picking up the remains of the tattered studio. But one individual who works frequently with big Chinese entertainment firms deemed it “highly unlikely” that either Wanda or Alibaba would try to buy Relativity.

The company struggled through a series of disappointing releases, including “Machine Gun Preacher,” the Gerard Butler vehicle about a motorcycle gangster turned do-gooder — long before it filed for Chapter 11 protection in July of 2015. Relativity claimed liabilities of $1.2 billion and assets with a book value of $560 million.

It first resolved to drag itself out of the swamp via an auction. But the court-supervised sale in September, 2015 drew only one bid –  from lenders already in hock for hundreds of millions of dollars. They made a credit bid of $125 million for the television production operation.

The sale meant the company’s most respected operation and its leader, Tom Forman, were outside the Relativity umbrella, and now operating under a new name,  Critical Content. The parent company’s sports management business became an outside operation, headed by investor Ron Burkle. Relativity Fashion, a modeling agency, folded. The parent company said it intended to refocus on its core movie business, while its new creative chief — Spacey’s producing partner, Dana Brunetti — talked of opening a new television division.

The company’s leaders claimed in an interview in recent days that they were ready to begin production of new films — beginning with “Strangers 2,” a sequel to the 2008 movie that earned $82 million worldwide. Two other sequels were to follow — “Act of Valor 2,” about a special police unit, and  “The Crow,” a remake of the cult classic. How production would be financed was not clear, though Kavanaugh suggested in the past he does not have to front much to make movies, because he gets so much by pre-selling rights to the pictures to foreign distributors.

So what does Relativity have left to sell? Not much, if its previous auction and the opinions of some of those close to the company, are any indication. Much of its film library was turned over to a subsidiary of the giant hedge fund Elliott Management in a 2012 transaction. The roughly 30 film titles that still remain under Relativity’s control could fetch something like $50 million, estimated one individual familiar with Relativity. But the junior and senior debt owed by the company amounts to $70 million or more, the source said, enough to erase any proceeds from a sale of Relativity’s library titles.

Relativity also clings to its contract with Netflix — which can net the film company tens of millions of dollars, if it produces the pictures required by the streaming service. Netflix fought steadfastly in bankruptcy court to have its contract with Relativity cancelled, with the tech company’s lawyers arguing that Relativity had breached its contract by failing to produce the required allotment of films.

Netflix’s lawyers, lead by Scott McNutt, were lonely voices in the bankruptcy court last spring — warning Judge Wiles that the Beverly Hills-based company did not have the management structure, or capital, needed for a successful restart. McNutt’s concerns were dismissed and he was treated — by fellow lawyers and by the court — as an obstructionist, while Relativity continued on its righteous course to a resurrection. (Netflix’s appeal is pending.)

If another company could purchase the Netflix contract, with its favorable terms, it could reap the substantial payments that go with the pact. But there are several potential impediments to a sale: Netflix’s legal challenge to the agreement looms large. In addition, the deal only runs through 2018, not a long term for a risky investment. And, significantly, most companies substantial enough to produce the number of films required by Netflix under the contract already have output agreements with other Web distributors.

Relativity also continues to own its half of RED, Relativity EuropaCorp Distribution, the joint venture it formed to release films. EuropaCorp paid $85 million for 50% share of the venture, which releases films for both companies. It’s possible the company, which started in France, would want to buy out the remaining interest of its struggling American partner.

Even in recent days, Kavanaugh gave an interview in which he touted the strength of Relativity’s relationships with foreign distributors. He suggested the company could finance future films by pre-selling the distribution rights in overseas. But one individual who works closely with foreign distributors said such many such arrangements will be increasingly difficult for Relativity to reach, given its recent bankruptcy and the pair of flops it has released since its reemergence. “After all that, who is going to go into a blind deal with this guy now for some future film?” said the middle-man, who declined to be named. “It’s just absurd.”

Few in the Hollywood community like to see companies that make films and television shows go out of business. The thought is that the town’s economy (not to mention talent and their reps) benefits if there are more companies paying to create content. But who would be the most direct losers if Relativity goes out of business?

For one, the roughly 75 employees who still work for the company. Also, losing out would be the creditors who are still trying to collect tens of millions of dollars in debt from the bankruptcy reorganization. And also filing IOUs are dozens of bankruptcy lawyers, financial advisers and others who have billed a total of at least $47 million, some $19 million of which remains unpaid, according to court filings.

Among those with the largest bills from the Relativity case are the two firms that led representation for the bankrupt company: Jones Day, which billed more than $11.9 million in fees and expenses, and Sheppard Mullin, which weighed in at more than $6.1 million.

Relativity’s reorganization plan included a provision for a segregated account, designated only for funds to go to pay the dozens of lawyers and other professionals, billing at up to $1,200 an hour. It’s unclear in public records how much remains in the special account. It’s safe to assume that the lawyers will be back in court to argue for more of what they say they are due.