Bold gambit by Relativity's Ryan Kavanaugh

Execs debating whether move to buy Rogue wise

The film world was startled earlier in the week when news surfaced that Relativity was in negotiations to buy Universal genre label Rogue Pictures.

The move would undeniably be a bold gambit on the part of Relativity CEO Ryan Kavanaugh. But the potential purchase -- which, for an amount in the ballpark of $150 million, would land Relativity about 25 Rogue library titles, four upcoming films and 30 development projects as well as a distribution arrangement -- had execs debating whether it amounted to a savvy expansion for Relativity or a more problematic buy.

And they wondered where it leaves projects set up at either company.

Even before the potential deal came to light, Kavanaugh was taking an aggressive development position, buying a host of books and scripts and putting them into development. After the news came out, producers and managers with projects in development were scrambling this week to make sense it. One who has a project set up at Rogue said in an interview that he was told so little about the deal that he was "learning about the future" from press stories.

And a producer with a project at Relativity expressed concern that as Relativity takes on Rogue development projects, it could push titles that Relativity has been developing on its own to the backburner.

Some, however, were more enthusiastic. Brooklyn Weaver, a manager who has set up projects at Relativity like the Ridley Scott-Leonardo DiCaprio collaboration "The Low Dweller," said that the company's ability track record in financing a wide range of films meant there was little reason for concern. "I'm not worried at all. Relativity's track record is good," he said. "They're not going to get myopic about the movies they want to make."

To understand how the Rogue deal would affect producers also means understanding how it changes Relativity -- and why the company made the transaction in the first place.

For Universal, the reasons for the sale are relatively straightforward: a parent company looking to offload assets sells a division that contributes only modestly to the bottom line. For Relativity, the calculus is more complex.

Kavanaugh's company had initially been a fairly traditional slate financier -- financing a large percentage of movies at Universal, for example -- but has been getting more deeply involved in the single-picture business with movies like "3:10 to Yuma," the Lionsgate-released western that grossed about $70 million worldwide.

That business has turned Relativity into an unusually influential company, capable of almost singlehandedly getting movies made. The problem is that the single-picture business has become infinitely more difficult as studios cut back on titles and screens remain at a high premium.

So Kavanaugh has sought to make what would be a remarkable transition into a quasi-studio by securing distribution -- or, as he put it recently, to "solidify our role as a competitive media entity."

Relativity's new deal moves indeed him closer to being a master of his own fate. But how close?

"For an independent, domestic distribution is the trickiest part of the puzzle," said Bill Horberg, the producer and former exec of another financier-producer, Sidney Kimmel Entertainment. "For Relativity to be able to control their own destiny in terms of dating the movies and the amount of P&A they're spending is very important."

Rogue will pay Universal a distribution fee -- somewhere around 10% -- to access Uni's distribution system. But details of the agreement are still vague. Certainly Rogue titles will be a part of it; how much leeway Relativity would have on non-Rogue titles remains an open question.

Even if the deal does offer a large number of puts, allowing Relativity flexibility in choosing its movies, some are wondering about the need for a deal. One of Kavanaugh's rivals -- echoing a theme form competitors who have looked on with puzzlement and probably a little envy as Relativity has expanded in difficult times -- questioned whether the purchase was necessary.

"The thing I don't get is why, with all the movies Relativity makes, they didn't have the leverage to get a distribution deal without buying a label," said the financier-producer, who also questioned why Kavanaugh would tie himself to the genre properties that Rogue has been developing. "By doing this, he's cornered himself more in the market of genre titles because that's presumably what he'll focus on."

And there remain general questions. Said one film-finance expert: "It's just so unusual for a studio to sell a label, and so there are still a lot of questions about what Relativity would actually be buying."
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