Financier Ryan Kavanaugh is having a pretty good week. First his court battle with Los Angeles spin consultant Michael Sitrick went his way last Friday --pending a promised appeal--when Los Angeles Superior Court Judge James Chalfant ruled that Kavanaugh had not misrepresented his assets in 2002 when he claimed he was unable to pay Sitrick $7.7 million that had been lost when Kavanaugh invested it on Sitrick's behalf.

Yesterday, he and his deep-pockets partner in his recently formed Relativity Capital, the hedge fund Elliott Associates, announced jointly with Universal Pictures a co-financing deal worth about a billion dollars. Relativity will co-finance (at an average 50 percent of the production, distribution and marketing costs) some 45 pictures, based on picking 75 percent of Uni's slate over the next four years.

"We spent one year getting this done with Universal," said Kavanaugh yesterday, "and the reason it took so long is it's a complete change from anything that's ever been done. We go 50-50 with them and we're perfectly aligned all the way down the capital structure, top to bottom. It's really a deal where we look at all of these pictures together."

What this does basically," says Universal Executive Vice President Michael Joe, "is that in one deal we've covered the bulk of our financing needs over the next three or four years, through a deal with one partner."

Joe points out that Universal is more than willing to include Relativity, which is staffed in part by film industry veterans, in every assaying aspect of the studio's green lighting process:

They see the script, they know the creative elements of cast, director, producer, et cetera, they know the production cost of the movie...they basically have all the information we have at the time we're making the decision--they get essentially all the same things we would look at here.

The deal is distinctive in two regards. The first is in the degree of control Relativity has in selecting which pictures they'll partner on. (Universal won't be not holding back certain of their most promising pictures, the earmark of certain "slate" deals investors have made in the past--e.g., hedge fund Dune Entertainent's highly successful Fox run might have been all the sweeter if the studio had given them a piece of the $574 million worldwide-grossing Night At the Museum.) Kavanaugh currently has similarly generous provisions in a deal he made with Sony about a year ago, updating their previous relationship).

Secondly, as explained in the joint press release,

The agreement is a key milestone for Relativity in that it is the first deal where Relativity acts as the principal and will retain the Mezzanine and Equity. Under the deal, Relativity will co-finance approximately 75% of Universal's releases during the term. Relativity Capital underwrote the capital structure of the deal, and did not use an outside bank.

Amy Wallace explained the structure of a typical film investment deal most lucidly in her profile of Kavanaugh last April:

First come the lower-risk investors, who commonly earn an 8 percent return on their money; then the "mezzanine" level, who are promised about 15 percent; and at the very bottom, the equity level, who own a piece of a movie's ongoing revenue, if any. For a blockbuster, this can mean a flood. For a bomb, it means they lose everything.

Says Kavanaugh,

This is the first deal where we don't have a bank partner; we're not selling it to hedge funds. Relativity Capital is a partnership between Elliot and Relativity, and we bought the entire capital structure. We funded the entire thing--if it wins, we win. If it loses, we lose no more speculating by the press on whether we lost or made third parties money. It's all us now.

The financier says it's gratifying to know that the deal guarantees not just a share in all the ancillary markets (DVD, Blu-Ray, television, etc.) in perpetuity, but they'll also co-own copyright to product they help finance and share in the proceeds should there ever be a sale of the universal library to some deep-pockets bidder.

No one's more aware of the stakes (financially and in prestige) than Kavanaugh; he's taken a pretty good thumping in the press for what many saw as the under-performance of various financing deals launched by his company under the rubric Gun Hill 1 and 2. In a Page Six item on a recent and highly skeptical Los Angeles Times front-page story, Kavanaugh attorney Marty Singer claims to see the hand of Sitrick, who specializes in consulting for those defamed (notably Halliburton and Paris Hilton) but can also play pretty effective offense.

And though he grants respect to JP Morgan Chase fixture John Miller, who before Kavanaugh and other hedge fund impresarios came along had an estimated 85 percent of the film financing business when it was done via collateralized loans, he vehemently disputes Miller's quoted contention that the film business is only returning about single digit profits per year to the studios: "If you do the analysis from financial reports," says Kavanaugh, "Certain studios may only make eight percent in a given year, but they generally operate somewhere north of 15 on a cash [returns] on cash [expended] basis." (About a year ago Miller announced the formation of his own group that will operate under the newer capital model.) )

Kavanaugh says he learned invaluable lessons on his first major financing deal: "We didn't quite hit our ideal range of 15-25 on our first one, and we weren't thrilled, but we were just under, and we've made a number of adjustments... for the first time we had the ability to say okay, let's take our models and look at why we didn't hit the range. Now that we have the actual performance of past movies, we'll tweak them and see what would happen if we had done things a little differently--what would we have had to tweak to get to our [hoped-for profit range] of 15- 25?

Elliot Associates' Jesse Cohn, who strenuously objected to the slighting portrayal of Kavanaugh and hedge fund investment in the Times piece that ran not quite a week before the Universal deal was announced, wrote a Letter To the Editor (unpublished) claiming: "Your article, incredibly, chose only to highlight films that lost money. ..." It's a semantic distinction--the article did list, if not highlight, Relativity Media successes like Inside Man, The Pursuit of Happyness and Talladega Nights that were among the 9 profitable films among 17 in the company Gun Hill Road 1 slate. Cohn further pointed out that the article cited the Warner Bros. oceangoing disaster Poseidon without mentioning that the subsequent 300 ($456 million worldwide) was a blockbuster success. Attorney Singer, a man other lawyers call litigious, has threatened legal action over what he sees as the Times' defamation of Kavanaugh.

Cohn says his fund operates judiciously, avoiding downside risk over 17 years. According to Elliott, the firm "seeks to generate a moderate return with a high degree of consistency, regardless of fluctuations in the stock and bond markets." From inception, an Elliott spokesperson says, "the fund has generated for its investors a 14.7% net compound annual return, compared to 12.3% for the S&P 500 stock index."

For Kavanaugh, who has his share of naysayers dating back to the collapsed investments that originally angered Sitrick, but persists as something of a legend for creating consensus ("He brings a spirit of problem-solving that's one of the things people really like about the way he does business," says Michael Joe) the profit steak looks good, but he also likes the sizzle. He declined to name which current Universal projects might end up with Relativity taking their half, but he's friendly with Ridley Scott and Scott companion (and sometime producer) Giannina Facio, and the British director has put a marker on the in-development Monopoly, one of several Hasbro Games projects that Universal has in its quiver since striking a deal with Hasbro last week.
Kavanaugh's also a declared Michael Mann fan--and Mann starts shooting in a few days on the Chicago crime drama, Public Enemies, starring Johnny Depp and Marion Cotillard.

Relativity should have plenty of films ot pick from--Universal's co-chief David Linde recently announced the studio plans to ramp up from a pace of about 14 features per year to close to 20, and they hope by 2010 (including some of their specialty divisions, such as Rogue and Focus, which are not part of the Relativity deal) to launch as many as 35 pictures in a year.

Kavanaugh, clearly excited by his prospects but perhaps still smarting a bit form the criticism he absorbed, emphasizes the rationality of his new partner: " Universal has been hands down one of, if not the most, profitable studios on he street for the last five year. People don't really know that because studios sell themselves on `Look how big our box office has been'; but you have to look at the bottom line of how they control spending, and what they make in other windows, and they are an extremely profitable studio."

How Universal and Relativity Capital fare together should make for the most conspicuous example of the newer class of investor-friendly financing deals--so even the Hollywood denizens who against Kavanaugh may find themselves rooting for this particular partnership to succeed.

(Kavanaugh, left, with director Roger Donaldson at a screening of Lionsgate's "The Bank Job" two days after a court win and the night before his Universal deal announcement; photo by Eric Charbonneau/WireImage)

Credit: Eric Charbonneau/WireImage
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