A version of this story first appeared in the Aug. 14 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.
On July 30, declaring it was “hopelessly insolvent,” Ryan Kavanaugh‘s Relativity Media, with assets of $560?million but liabilities of a whopping $1.18?billion, filed for bankruptcy protection in New York. Since May, when more than $330?million in outstanding debt came due, Kavanaugh, 40, the Los Angeles-born wheeler-dealer who co-founded the film and TV company in 2004, had been working furiously to bring in new investors and forestall a default. Many in Hollywood have been predicting Kavanaugh’s downfall for years: After starting his first company at 22 (it failed), he’d secured a foothold in the movie business in the mid-2000s by bringing in financing to back $500 million-plus studio slates at Sony Pictures and Universal Pictures. His young age, helicopter-flying lifestyle and outspoken political activism (especially in defense of Israel) helped make him a target of industry attention. And when Relativity started making and releasing its own movies in 2010, even though Kavanaugh claimed to be reinventing the business with a set of algorithms that minimized risks, many predicted he would fall flat. The poor box-office performance of many Relativity movies only increased the chatter.
By early July, Kavanaugh thought he had found a reprieve when Bay Area fund VII Peaks Capital said it was investing “significant equity” in Relativity and Toronto-based Catalyst Capital Group agreed to buy $130?million in senior debt. Kavanaugh also claims Catalyst promised to make an equity investment of $170?million, though that’s when his troubles really started. On July?9, subordinate debt holders, led by hedge fund Anchorage Capital, exercised an option and bought out Catalyst. A few weeks later, Kavanaugh had run out of time and Relativity sought Chapter?11 protection. He has remained mostly silent since then.
But now, the embattled Kavanaugh, in the course of a wide-ranging two-hour interview with THR, his first since the bankruptcy, says he won’t surrender. He insists that despite significant handicaps — like the fact that he turned over most of the film library (and its revenue) to extricate Relativity from hedge fund Elliott Management in 2012 for roughly $1?billion — Relativity had been on course for a 2016 IPO offering. Instead, he offers a version of events that portray him as the victim of a Shakespearean betrayal by Jason Beckman and Jason Colodne, partners in New York-based Colbeck Capital, who helped syndicate Relativity debt. While sources close to Colbeck insist the firm was operating with the full knowledge and endorsement of Relativity’s nine-person board — a board that includes billionaire Ron Burkle, who has invested an estimated $800?million in the company; Tucker Tooley, its president; producer Mark Canton; former talent agent Jim Wiatt; manager Shep Gordon; and Kavanaugh himself — Kavanaugh’s opinion is that both Beckman and Colodne (close friends who stood witness at his March wedding) orchestrated a stealth campaign to “steal” the company from him through financial maneuvering.
Although his days as CEO may be numbered, Kavanaugh has been spending much of his time at UCLA Medical Center, Santa Monica, tending to a more personal problem. His wife, model Jessica Roffey, 30, has been hospitalized after going into early labor with their first child at 22 weeks. As Kavanaugh tells his emotional side of the story — one version among others — his voice becomes a gravelly whisper: “I never thought an interview would make me cry.”
Relativity president Tooley (right, with Kavanaugh at the Polo Lounge at The Beverly Hills Hotel, photographed by Christopher Patey in 2014) has been running day-to-day operations and could stay on even if his boss is ousted.
What have these past few weeks been like for you?
My wife has been in the hospital for a month. I’m watching two babies of mine go through hard times. It’s almost surreal because on one hand I’m having a doctor tell me, “I don’t know what’s going to happen to this baby,” and on the other hand I’m having?my lawyers telling me, “I don’t know what’s going to happen to this baby.” But in my?lifetime, everything has happened for a reason.
Only a few months ago, Relativity was talking about an IPO, and now it’s in bankruptcy. How did you get from there to here?
That is a very complicated and long answer with many twists and turns. In 2012, we had to sell our entire library to Elliott in our restructuring. The way that GAAP [generally accepted accounting practices] works in the film business, you have to write off expenses the day you put a movie out, but you recognize the revenue for a seven- or 10-year period. So there is a ramp-up period that has to take place for a distribution company. This means that no matter how profitable a film may be, you’re generally going to show a loss for five or six years.
Because the company had doubled its revenue and more than tripled its EBITDA despite that 2012 sale, it was looking very likely that 2016 would actually be that turning point. We brought in three different bankers, and all three spent weeks, if not months — in some cases over a year — working with the company and confirmed that it would be a viable IPO candidate for early or mid-2016, and we had ranges from $5?billion to $10?billion.
What changed is that in a company like ours — if you look at Fox or Universal or Paramount, they have a parent [company] that seeds them with $1?billion to $2?billion a year to make new productions [because] it takes time for DVD sales, digital sales, free and pay TV sales. But we have to continue to raise cash until we get to a place where we have enough cash flow from our library to sustain the going-forward movies.
Four or five months ago, we had firm commitments on the table for more than enough money to take the company to an IPO.
From left: Director Michael Hoffman, star Michelle Monaghan and Kavanaugh at the October premiere of Relativity’s ‘The Best of Me.’
Who were you in talks with? Bay Area fund VII Peaks?
We were in talks with a number of investors. We had turned some of those talks into firm, binding, committed deals. The deals, like the $350?million deal with VII Peaks, were actually thwarted and/or stolen by a board member and paid adviser who saw a different plan for themselves to line their own pockets and hurt everybody else in the company.
OK, let’s talk about that. Was it Colbeck Capital?
Yes. They [had a board seat at the time], they [had] a fiduciary duty to the company to maximize value for equity and debt. They were being paid $300,000 a month to be consultants to the company. In 2012, before the company bought Elliott out, Relativity had zero debt. When the company needed to buy Elliott out, it hired Colbeck to go syndicate that debt. Colbeck pulled out of the company in excess of $100?million in fees and interest, maybe $150?million.
So we had signed commitments, and the banks were saying, “Great, you have more than you need to get you to profitability, and we’ll be taking you public.” We even started getting our accounting department to start quarterly audits so we could be a public company.
Who else were the commitments from?
A very well-known hedge fund who reviewed all the commitments and said this is a done deal. [Kavanaugh would not name the fund.] We needed to raise an?additional $200?million. What ended up occurring is that Colbeck — and we didn’t even know this for four months — [was sabotaging the deal]. A number of their investors have come to me and flipped sides and said, “We want to support you in this process because we’ve realized how sleazy it is what Colbeck did.” [Kavanaugh declined to say who these investors are.]
Explain what you believe they did.
There were basically four people raising capital, and we had a whole group of people interested. So we had a number of meetings where we divided and conquered who was going to go raise, who was closer to which group. A number of them were parties that I had close relationships with, but I said [to Colbeck], “You’re in the hedge fund world, you should call them.”
It turns out Colbeck never called any of these parties to pitch the Relativity plan. [Instead,] they created a business plan, which we have a copy of, that was, let’s call it, “A Colbeck Takeover of Relativity.” [The proposal, a portion of which was seen by THR, was sent to a group of potential investors.] In their mind, if they could effectively get the equity to not show up, the debt would come due, and because they were so close with the debt, they could utilize the debt maturity to force a sale at effectively about $1?billion and make themselves an extra $1?billion. And of course, Colbeck was going to receive between 25 and 30?percent of the company. [A rep for Colbeck responds to this and Kavanaugh’s other claims of self-dealing: “The Relativity board and Ryan Kavanaugh fully authorized Colbeck to run a parallel process.”]
I want to make it very clear, because we keep seeing in the press that Colbeck is against Relativity or Colbeck is running this process. Today Colbeck’s entire?relationship with Relativity is, I think they have around $6?million or $7?million of the total $500?million of debt. And I think they have — other than some options that came along with the original debt — a 5?percent employee stock grant that I suggested they get for their hard work and gave them about eight months ago.
Other than that, they have no interest, they don’t control the company, they don’t own a big piece of the company, they don’t have a say over the company.
Gerard Butler (right) made ‘Machine Gun Preacher’ with Relativity and became a Kavanaugh confidant.
Do they have a board seat?
No. They were going to be fired, and before they could be fired, they stepped down.
They have said they still have a board seat.
They do not. Now, Ron Burkle has a board seat. But Ron Burkle does not own Colbeck. His only affiliation with Colbeck is that if they bring him deals, and if he likes them, just like if Joe Schmo brings him deals and he likes them, he’ll fund them and agree to some economics. That’s his relationship with Colbeck. [Burkle, through a spokesperson, declined to comment on his relationships with Colbeck or Kavanaugh, though a source close to him issued a statement to the press in support of Kavanaugh in May.]
So is the oft-repeated line that Ron Burkle backs Colbeck not accurate?
It is not accurate. I can’t answer if he would back future deals. I would be highly skeptical considering that I consider Ron to be one of my best friends.
Jason Beckman once was a very good friend, right?
While this was going on, [Beckman and Jason Colodne] signed the ketubah at my wedding. A ketubah is a Jewish marriage document. It’s the most sacred of all documents. You have the first and closest to you sign as a witness that you’re getting married. The two of them signed my ketubah, and this was while they were doing this and I didn’t know.
Why would they do that?
The motivation is very?simple. You can take the person out of the distressed banking job, but you can’t take the distressed banker out of the person. So having been ex-heads of Goldman Sachs distressed banking, I think they just saw an opportunity where if they could just push it far enough along to where our debt was going to be coming due, they could jump in with their own equity and their own plan. And I have a copy of the business plan that would take them from owning basically none of the company, or let’s say a fraction of a fraction of the company, to being 30, 40?percent shareholders and make themselves $1?billion.
If you believe you have proof, will you sue?
I can’t comment. But I can tell you that people with knowledge of the situation say I have, quote, “the mother of all lawsuits.” What I can also tell you is that during this process, they made up a lot of negative things. They were saying things to people like I was pulling money out of the company and making all this money off the company. [A source close to Colbeck denies this.]
Prior to the Chapter 11, people I’d never met, they randomly called me and said, through a mutual friend, “I think we should meet.” And they would bring up things like they hear that I was spending so much money out of the company, burning all this money. They failed to mention that I put $25?million of my own money into this preferred round six months ago because I was so confident on the refinance. I put $15?million of my own money into the last equity round. I put $10?million into our own P&A facility. When the company didn’t have enough money to do certain movies, I put $3?million, $4?million, $5 million into movies on my own.
I haven’t added up the numbers, but let’s say it’s $50?million, $60?million that I’ve personally put into the company in the short term. I’m not taking a salary. I’m still the CEO and chairman, but I’m actually taking a one-dollar salary.
Kavanaugh (left) and Harrison Ford at the ‘Paranoia’ premiere afterparty in 2013.
To be clear, describe what you think Colbeck did?
They … took an opportunity that they saw to try and effectively steal the company. And they were on the board of directors and they were paid consultants, which changes their duty. For example, I turned a hedge fund over to them that was ready to invest — done, ready, finished the diligence, ready to invest $25?million to $50?million. When I called the hedge fund back and said, “You talked to Colbeck? Are you in?” They said, “No, we didn’t hear about any plan, except Colbeck just pitched us on their plan.” And they had a copy of it. “Colbeck wants to take the company over, get rid of you.” [Kavanaugh declined to identify the fund.]
Was the plan to push Relativity into bankruptcy?
No, I think that actually backfired on them. I think what happened was they thought they had this capital together. They had a Russian group backing them. And the Russian group was putting up $150?million. And so they only needed to raise probably another $250?million. And they would have then negotiated with the debt and they would have executed on this plan.
What ended up happening was the Russian group bailed on them. [Kavanaugh declined to identify the Russians.] So six or seven months ago, Anchorage comes and buys $30?million or less of [subordinate] debt. Now, the founder of Anchorage, Kevin Ulrich, and Jason Beckman are best friends. [Colbeck] hired [New York PR firm] Rubenstein quote, “together” [with Anchorage], so when you see in the press Colbeck/Anchorage, Colbeck’s trying to make itself seem important. [Anchorage did not respond to requests for comment.]
You’ve got Falcon [Investment], who holds the biggest B position. You’ve got Luxor [Capital], who holds a position bigger?than Anchorage or Colbeck. They’re not?mentioned anywhere. The point is that this is clearly being instrumented not by the lenders. Anchorage has [just] $25?million invested.
Maybe five months ago, we started getting some weird press calls that Ron Burkle had turned on Ryan, and this guy [TPG Capital consultant and former CEO of Fox Networks Group] Tony Vinciquerra — I had no idea who this guy was — was coming in to run the company at the behest of Ron. Ron and I were both scratching our heads like, “This is horseshit.”
We know it was started by Colbeck and Anchorage, using Rubenstein to try and start implying that there was a rift between Ron and I and try and get the press to stir it up. [Responds Rubenstein: “Rubenstein did not begin working with Colbeck until June?18, 2015, and up until that point, Colbeck had not spoken with any media.”]
So you became radioactive at that point?
We found out that Rubenstein has a very close connection to the New York Post and has basically just been feeding the Post the whole time. Like every negative thing they can.
Behind the scenes, who is being supportive of you?
Ron Burkle has been one of the most supportive people I could possibly ask for. He put his own personal money in. He owns a lot of the equity.
You’ve been scrutinized since you began Relativity. And many people won’t believe what you are saying now. Why is that?
I said I was going to change Hollywood. I said I was going to change the model. Every two years there was a new story or rumor as to what was going to happen, and it was our demise. None of them came true, not one for 12 years. So all of a sudden, there’s a hiccup. And that’s what I’m going to call this, a hiccup. Because we’re not in a Chapter?7, we’re in a Chapter?11. It’s a reorganization, right?
Universal’s Ron Meyer (right) was an early Kavanaugh supporter as Relativity invested in studio slates.
But Relativity has huge debts. Do you at least concede there was a flaw in your business model?
I will stand by our business model 100?percent. The fact that I was really inside the studios [with slate financing deals], I saw they’re risking between $250?million and $350?million per movie between [prints and advertising] and making the movies. And they have the ability to do that because they get $2?billion a year so they can swing for the fences every single time, and then once in a while they get that billion-dollar hit, and you know what that does for them? That gives them a 12?percent return. No hedge fund in the world would stand for that. It would be like, “This is $2?billion for a 12?percent return on a venture capital risk?” It is the most ridiculous business model. But it gets sheltered from the rest of the world because they’re all owned by such large media conglomerates. I can tell you that a majority of other studios’ movies lose money. But they get a fresh $2?billion every single year. They don’t have to worry about when the cash comes back on movies and they get their Superman or their Batman or their Iron Man.
So we created a business model that I stand by that nobody else has created. I have partnerships in 167 countries. It takes the risk out of the films for me. Instead of spending $70?million marketing a movie hoping to get high box office so I can look good to the press, I spend $25?million marketing that movie hoping to get to the right box office, one or two quadrants, so that I can maximize the actual place where the profit is, which is in digital and DVD. I would much rather have 70?percent of $19.99 than $5 of a $10 movie ticket that I’m spending $70?million to market. The problem is that we were capital-constrained since 2012, when we sold our library to Elliott. We had to get this $350?million debt financed that Colbeck did for us. Colbeck lined up the terms. It basically left the company with $80?million. Last year, because of the way my model works, we had less than $10?million invested in film. I think 83?percent ended up making a profit. The problem is that when you’re making those films, they make a small profit, and it takes two, three, four years to actually get the cash back. Our model is for 60, 70?percent of our films to make a modest profit, 20?percent to make more than a modest profit and lose on 5 or 10?percent. [On an unprofitable film,] we lose $5?million or $10?million, not $250?million, like the studios can.
You often are criticized for having a lavish lifestyle. Fair?
If you called up any of my friends, they’d tell you that the press paints me in the exact opposite way of what I really am. Yes, 10 years ago, did I have a party every six or seven or eight months or a Fourth of July party? Sure. But I don’t drive a Ferrari. I drive a Ford F-150 pickup truck. My wife drove a Jeep Wrangler. Yes, I fly private. It’s a jet I personally bought — not the company.
I made close friends with certain people like Bradley Cooper or Leo [DiCaprio] or Gerry Butler. They are very close friends. If you ask any of them what we do, they come to my house and we watch movies. (Laughs.) It’s almost like saying — and I hate to say it — but why does Rupert Murdoch get a lavish lifestyle? Or Jeff Skoll? Or Les Moonves? I’m not putting down [Moonves’] movies, but we beat CBS [Films] every year in box office. Nobody is saying, “Why does Les Moonves have a beach house and live his lavish lifestyle?”
Kavanaugh chatted with THR at the Milken Global Conference last year.
Did you buy your CFO a Maserati?
I did not buy a CFO a Maserati. Did I lease for various people within the company cars that they would normally not lease for themselves when they would do extraordinary things? Absolutely. But unlike other companies, we don’t have every SVP and above all get car allowances or a car lease. We developed 300. [Director] Zack Snyder, after the premiere, Warner Bros. handed him a $270,000 Aston Martin. It’s not an uncommon thing.
Do you think you are a target because of your politics?
There’s reasons why there’s groups like [secret conservative organization] Friends of Abe. They’re scared they’ll be blackballed from Hollywood just to say what they believe in it. I remember I read an article [about Relativity’s woes] where someone was like, “And while this was all going on he took the time to write a piece on the president and slamming him about Iran [nuclear deal].” I read that and I couldn’t believe they even questioned that — the fact that I [took] 10 minutes out of my day to say I believe the fabric of America is at risk? You don’t have to believe me, but let’s assume that maybe there is a 2 percent chance I’m right, shouldn’t I be writing that and not be selfishly focusing just on my company?
The judge has given Relativity $9.5 million to operate, not the $45?million requested. How do you run the company given those constraints?
I can’t really comment on the bankruptcy. I can just say it’s the beginning of the bankruptcy, and that’s not going to be the end. A lot is going to happen.
What happened with the Catalyst deal?
When this started to go bad with Colbeck, and it looked like [Beckman’s] plan was working, I brought in Catalyst. They came in and in less than five days not only agreed to but wired $130?million to buy out our entire senior debt and agreed to extend [debt payment] by one year and also agreed to give us $170?million of working capital. [Catalyst did not respond to a request for comment.] Anchorage, which was one of our smallest term loan B lenders, stepped up without talking to us, without saying a word — we didn’t even know they had this right — and bought back $130?million. Two weeks prior, I was walking into the office, getting high fives, like, “You did it again.” Within an hour, I got a call from the lawyer saying Anchorage just exercised an option to buy out the term loan A. I was like, “What are you talking about? How can they buy out the term loan A?” In page 162 of a 496-page [contract], there is some provision that says the junior debt can always buy the senior debt.
Did your lawyers miss that clause?
I have no idea. They don’t say they missed it, they say they just never thought that [Anchorage] would [exercise it]. They say it was always there, and I should have known about it. Why would Anchorage do that? It didn’t make any sense.
Who is running the company now?
I’m the CEO and chairman. I am running the company. It still has the same board, the board is 100?percent supportive of me. I still actually have control of the board, and that’s the way it’s going to work through the bankruptcy. I’m not planning on going anywhere.
[After the publication of this story, Kavanaugh clarified his response to the question of who is running the company now, saying: “While it’s true that I am chairman of Relativity’s board of directors, that does not imply that I control the board, its deliberations or the exercise of its fiduciary duties. The board is independent, and the company’s directors are committed to proper governance and the fulfillment of their duties under the law, without regard to the source of their election.”]
Kavanaugh, Snoop Dogg and Chelsea Handler were shot for THR’s annual Pets Issue in 2013.
But you could be forced out.
This is a bidding process. If Anchorage, Colbeck or any iteration of one of their 100 affiliates buys the company, they will then own [Relativity], and they will have a right to do what they want. They could pick their own CEO and pick their own board. If someone pays up for the company and ends up owning it and doesn’t want me to be the CEO or chairman, that’s going to be their decision. They can say, “We want Tony Vinciquerra.” But Tony came in [for a meeting with Colbeck] under the guise of a consultant [for TPG] when he is on the board of a competitive studio [STX Entertainment], and that wasn’t disclosed to me. He was actually coming in to take my job. He sat there, and I gave him my whole business model. In my opinion, A) he’ll run the company into the ground, but B) I definitely won’t go quietly into the night. [A TPG spokesperson confirms Vinciquerra met with Kavanaugh and Colbeck but says he ultimately recommended TPG pass on investing in Relativity.]
Is Brian Kushner, the restructuring officer, calling the shots now?
A chief restructuring officer doesn’t call the shots. The CEO doesn’t even call the shots. The board actually calls the shots.
What is your message for film and television producers trying to pull projects from Relativity?
The word “bankruptcy” inside Hollywood is very scary and outside Hollywood is not. Look at the names of companies that [have been through it]: Eddie Bauer, Chrysler, Circuit City, MGM, Marvel, any airline you’ve ever flown, CIT Group, Macy’s. Outside of Hollywood, nobody pays attention to it. For all the producers, writers, directors who worry what’s going to happen to their projects, this is not a process by which they wake up on a Tuesday and someone says, “OK, everything is done.” This is a process that is actually set up specifically to avoid that situation. Their projects will get made, the movies will come out. It’s not going to be half-assed, it’s going to be twice as good.
What about the vendors who are owed money?
If I have anything to do with it, as CEO and chairman of the company, I will make sure they get as much if not all of their money paid through one form or another.
What about the people who have been laid off?
Personally, it was the hardest thing I’ve ever had to do. [Choking back tears.] We consider Relativity a family. Out of those 70 people, 50 of them thanked me and started crying and said they would come back here in one phone call. They didn’t deserve to be let go. If I end up with this company, not that I’m saying I’m bidding on it, almost every one of those people will be brought back.
My biggest regret was trusting Colbeck. My second biggest regret was not being more involved in the making and marketing of the movies since 2012.
Are you sorry it came to this?
Am I sorry? Of course I am. This company should not be in bankruptcy.
What has been the personal toll of this on you?
The headlines want to destroy me. But it’s important to say: Relativity is in bankruptcy. Ryan Kavanaugh is not in bankruptcy. I’ve been very lucky that I’ve made quite a bit of money through the last 10 years, and I’ve been very lucky that the investments have panned out, I’ve been very lucky that on the way up I sold a lot of stock through Relativity, and I own 40 other companies.
But you hold a lot of common stock. Doesn’t that get squashed in bankruptcy?
Oh yeah. I’ll lose $60?million or $70?million in this, no question, if not more. It’s not a small amount of money, but it’s not going to wipe me out.