Entertainment company Relativity Media, the company responsible for “Immortals,” “Act of Valor,” “Oculus” and “Machine Gun Preacher,” has filed for Chapter 11 bankruptcy.
Relativity Files for Bankruptcy
The 11-year-old digital-age entertainment company founded by Ryan Kavanaugh often boasted clever financing in addition to data analysis could lead to big box office numbers has filed for Chapter 11 bankruptcy protection. During Chapter 11 a company proposes a reorganization plan in order to keep business open and pay back creditors. In Relativity’s case, it seems there are a number of disgruntled investors and creditors. According to a company statement, parts of the“next-generation global media company” will be sold at auction.
Relativity Sports; Relativity EuropaCorp Distribution, a joint venture with the European film operator; and Relativity Education will not be included as part of the bankruptcy and will continue on as independent concerns. The company’s fashion division, M3/Relativity, has been shut down and its employees laid off.
Auction of Company
Relativity has stated liabilities of up to $1 billion. Kavanaugh, 40, and the board proposed an immediate auction of the company by a bankruptcy court. The bulk of the company’s assets will be passed to a new entity, RM Bidder. RM Bidder is a holding entity controlled by Relativity’s lenders. Lenders anticipate the sale will be completed by early October.
According to the statement released by the company, Kavanaugh and his senior management team will remain in charge. According to sources, Kavanaugh has reached out to investors in hopes of attracting bidders for the crumbling company.
While it’s envisioned that Kavanaugh will remain as the head of Relativity, it could be difficult given the depth of the financial pit the company has incurred: $320 million in loans that could not be repaid, and tens of millions in bills from unsecured creditors.
Kavanaugh recently faced allegations of fraud for allegedly misdirecting funds that were intended for the release and promotion of the company's film slate. The lawsuit, filed by a New York film financing firm, was vehemently denied by Kavanaugh. Additionally, several observers of the company have expressed high skepticism about the CEO remaining in his position.
Bankruptcy Petitions
The bankruptcy petitions were filed in New York court on behalf of parent Relativity Media and 144 subsidiaries and holding companies, most of which are LLCs formed for the production of individual films. In addition to the estimated $500 million to $1 billion in liabilities, the company claims assets of between $100 million and $500 million.
It’s unusual for a company to go to auction, but it makes sense given Relativity’s dire financial situation. It seems that the company, which is based in Beverly Hills, was unable to secure sufficient cash flow to even be able to continue anything close to normal operations. Relativity’s shell firm will take control of the company’s assets on behalf of lenders.
The auction of the company will be conducted under the supervision of Blackstone Group and FTI Consulting, which has overseen Relativity’s troubled cash balances for several weeks. Brian Kushner, a senior director at FTI, will guide the sale of the company and has been named the “chief restructuring officer.”
Statement from Kavanaugh
It a statement released by the CEO, he says: “Relativity continues to pursue its mission as a next-generation global media company, and we remain firmly committed to our film and television businesses. The actions we are announcing today will protect our valuable franchise and allow us to emerge as a stronger, more focused company.”
Kavanaugh went on to say that the management and the company’s board had considered a number of options in light of its financial distress, but that eventually had concluded that only a court-supervised reorganization under Chapter 11 would “achieve our financial and strategic objectives.”
Debtor-in-Possession
In order to be able to continue ongoing operations, Relativity is pursuing a $45 million debtor-in-possession loan that will provide interim financing and help to pay for the Chapter 11 bankruptcy process.
It has plans to “continue to move forward with a robust production slate of scripted and non-scripted shows during the company’s reorganization process.” It will still release two of its films: the comedy “Masterminds” and the Halle Berry thriller “Kidnap.” Plans for funding the films’ promotion and distribution are being negotiated with other sources. It also has plans to continue with its planned remake of “The Crow,” which is set to begin shooting in the fall.
One of the company’s TV shows, “Limitless” is still set to debut on CBS.
Contentious Bankruptcy Process
Individuals connected to the company’s lenders and creditors expect a highly contentious bankruptcy process, involving multiple lawsuits. Since senior lenders such as Anchorage Capital and Falcon Investments are in line to get a majority of the proceeds from the planned auction, junior lenders in addition to a long list of unpaid vendors may only get the leverage they need by threatening to hold up a settlement through litigation.
Push Back on Releases
As Relativity struggled with liquidity, payment deadlines came and went. As a result, the company had to push back film releases, and also told some vendors that they would not be repaid any time soon.
In mid-July, P&A investor RKA Film Financing sued the company, saying that the money it had loaned to Relativity ($7.5 million) was still owed to them and that the deal had been breached. The following week, RKA filed a second lawsuit, claiming that Kavanaugh was a “con man” who “through dishonesty and deceit operated a scheme to defraud investors and convert and misappropriate their funds.” According to the $90 million lawsuits, filed in Supreme Court of the State of New York, RKA claimed Kavanaugh and others at Relativity had used hundreds of millions of dollars from lenders to help support the company’s failures rather than spending the money on production, as had been mandated in the contract. Relativity responded with a $200 million counter-suit against the P&A financing firm, with claims that RKA was attempting to take advantage of the media’s reporting about the studio’s refinancing efforts as a way to make a profit.
But it seems RKA was not the first to bring similar suits. In late May, after Colbeck Capital demanded performance by Relativity, the company responded with accusations that the New York investment house was spreading false rumors of financial instability. According to Relativity, Colbeck’s principals exaggerated the company’s money issues in an attempt to take control of the mini-studio.
As Kavanaugh had stated in the past, he did not need big numbers at the box office to succeed. Rather, the company would rely on “singles” and “doubles” and be able to turn a profit because of judicious production budgets and foreign pre-sales. But unfortunately, that was not often the case. Liam Hemsworth thriller “Paranoia” grossed $7 million domestically while the production budget estimated at $35 million. And 2011’s “Machine Gun Preacher” brought in just $539,000 on a production budget of about $30 million. Kavanaugh often touted his company as a popular alternative funding source for studios like Sony and Universal and was able to receive production credit on enough hits — such as “The Fighter” and “The Social Network” — in order to maintain Hollywood credibility. Forbes had put Kavanaugh’s net worth at $1 billion. And as recently as June, a Relativity representative suggested a public stock offering arriving in 2016 would bring a big cash infusion.
But signs of impending doom were all there – when the releases of “Masterminds,” “Before I Wake,” “The Bronze,” and “Kidnap” were all pushed back. And when Relativity announced plans to move “Masterminds,” it also publicly acknowledged its financial difficulties, saying that the extra time needed to release the movies was “to allow the company to focus on its recapitalization and give this film the proper attention and support it deserves.”
Working with an Attorney
Facing bankruptcy, regardless of if it’s a personal or business bankruptcy, is a scary thing. There might be ways to avoid it and still keep your credit intact. Working with a bankruptcy lawyer will ensure you are made aware of all the options available to you. Because bankruptcy law can be confusing, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have should you decide to file. There can be a lot of questions during this extremely stressful time. Let the lawyers at RHM LAW LLP walk you through the process so you can achieve the best outcome possible.