A capital deal for Universal

Relativity to co-fund 75% of studio's slate through '11

Universal and Relativity Capital have partnered in a deal that will see Relativity co-finance a significant chunk of the studio's slate during the next four years.

Relativity will co-finance about 75% of Universal's releases during a term that runs until 2011, a deal that could encompass close to 45 films and involve a fund of about $500 million.

The deal includes all the studios' titles, including Working Title and Imagine Entertainment projects, and operates similarly to the one Relativity inked with Sony in January 2007. It excludes Focus Features titles.

The deal in essence will allow the company to co-greenlight films with the studio. Sources said the first title covered under the partnership is "Leatherheads," the George Clooney period comedy set to bow April 4. Other titles receiving the infusion of capital include "The Wolf Man," "Hellboy 2: The Golden Army" and "The Fast and the Furious 4." The films Relativity will be jumping into will have budgets ranging from $20 million-$180 million.

Relativity principal Ryan Kavanaugh called the deal "a true partnership," saying the company took what it learned through its slate financing entities Gun Hill I and Gun Hill II, which encompassed films from Sony and Universal, and spent the past year negotiating a pact that would work for both sides.

"This takes care of our film financing needs for the next three years," said Rick Finkelstein, vice chairman of Universal Pictures. "Film financing is part of our plan. It spreads the risk, it allows us to use less cash. It smoothes things out for us and you don't have so much volatility."

The structure of the deal will see Universal come to Relativity with a movie and the latter deciding to either opt in or not. It covers production costs but not marketing and P&A, which will be recouped first.

"Virturally every movie they look at, we look at," Kavanaugh said. "The talent, the budget. We participate in every part of the process from the top down. You name it, we are their partner. We particiapate in every medium of revenue that they particiapte in, whether it be in theatrical, DVD, TV, airline, VOD, in perpetuity."

Relativity already had financed part of Universal's slate, investing in six films through its Gun Hill I fund. "The Kingdom," which underperformed in September, lost the fund money and initiated a flurry of reports that private-equity investors were being schooled by Hollywood and would soon bail out.

"Kingdom," however, was the only lump of coal in a pile of what turned out to be if not diamonds, then certainly gems for investors. Gun Hill I made money overall, with such profitable titles as "Nanny McPhee," which made more than $122 million worldwide, and "Inside Man," which grossed more than $183 million worldwide. Other titles included "The Fast and the Furious: Tokyo Drift" and "Smokin' Aces." It broke even on "Doom."

Elliot Associates was the main investor in Gun Hill I, and it returned to Relativity to form Relativity Capital. Relativity Capital underwrote the capital structure of the deal and did not use an outside bank. It is the first deal where Relativity serves as the principal and will retain the mezzanine and equity levels of investment.

David Davis, managing partner of Santa Monica investment advisory Arpeggio Partners and a skeptic on equity financings, said the mass of titles in the Universal-Relativity deal should help its chances of turning decent profits for investors.

"I would still be concerned about cherry-picking by the studio, as it's always better for investors to have their investment in 100% of a studio's releases," Davis said. "The vast number of films in this proposed slate would likely have a more industrylike performance than a smaller deal. But given the overall industry economics, it's still very difficult for equity investors to make returns in excess of 10%."

Carl DiOrio contributed to this report.
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