• The Hollywood Reporter on LinkedIn
  • Follow THR on Pinterest

Relativity, Elliott Spin Off Universal Movie Fund

UP: Ryan Kavanaugh

Move comes amid rumors that the two have been reassessing their relationship.

Relativity Media and Elliott Management Corp. on Wednesday jointly agreed to spin off the Beverly 2 Fund, which finances movies distributed by Universal Studios.

The move comes amid rumors that Relativity's CEO Ryan Kavanaugh has been considering a change in their business arrangements or possibly a dissolution of the partnership. Elliott issued a statement Tuesday saying its stake was not for sale.

STORY: Will Ryan Kavanaugh's Relativity Media Split From Financial Backers?

It also addresses the growing tension between Relativity and Universal, which is now also a competitor in movie distribution. "The spin-off of Beverly 2 will allow Relativity to avoid the inherent conflicts of interest that have arisen as a result of Relativity's move into distribution (as recently evidenced by the competing Universal and Relativity Snow White projects)," Relativity says in a press release.

While there is no secret that there has been growing tensioin between Universal and Relativity, the announcement appears to have been a surprise to Universal, which got no advance warning that it was coming.

Relativity still has a significant deal to finance movies for Sony Pictures Entertainment which appears unaffected by the spin-off of Beverly 2. A Sony spokesperson said Wednesday that their deal is not affected by this move.

However, the Sony movie financing deal expires next year, and it was already anticipated that it would not be renewed.

Until it got into domestic theatrical distribution, Relativity for more than five years has been a key financier of movies for Universal. While some of those have been hits, others have not and overall it is believed Relativity has lost money on the deal.

A year ago Relativity had hired Michael Joe away from Universal. Then on May 12, in a move that surprised many in Hollywood, Joe left Relativity to join Elliott, a New York City based hedge fund with assets of more than $13 billion, which has invested well over $1 billion in Relativity. By some accounts they have invested as much as $1.8 billion to date. Elliott has declined to say how much it invested, but did report it was significant.

Joe, based in L.A., will now be charged with overseeing the Beverly 2 fund for Elliott Media Investments LLC, a newly created affiliate, as well as keeping an eye on Elliott's investment in Relativity.

Created in 2008, the Beverly 2 fund is supposed to provide financing for 75% of Universal's movies through 2015. While there have been flops, the recent movie Bridesmaids, jointly financed under the deal, has turned out to be a big hit.

According to an announcement Wednesday, as part of the agreement, Elliott will invest additional capital into Relativity to help it develop its slate of movies for a 2012 release.

However, sources in the financial world were skeptical that Elliott would invest a significant additional amount, and believe the insertion of that information is a way for Kavanaugh to save face. There is also serious skepticism about a blog report that investment bank J.P. Morgan is going to lead a fund that would buy out some or all of Elliott's interest.

Relativity says it will remain a producer on selected Universal movies and Relativity's Kavanaugh will remain as an Executive Producer. Relativity and Kavanaugh will get a producer's fee on each of those movies.

"As our core business of developing, producing and distributing our own product has grown to be competitive in size and scope with the majors, this move allows us to focus our energy on that business," said Kavanaugh.

"This move allows Relativity to focus on producing and distributing its own home-grown product," said Joe.

In the release Kavanaugh is described as majority shareholder of Relativity Media. In the past, he had avoided saying how they split the equity, but a year ago a source close to Relativity said they were essentially equal partners.

Pamela McClintock contributed to this article.