Relativity bankruptcy dings marketing suppliers

By Robert Marich
   Aug. 1, 2015—The bankruptcy filing earlier this week by fast-growing independent film distributor Relativity Media stings a raft of venders and financiers in the marketing area.
   In its bankruptcy filing, Relativity—which made modest hits Limitless and The Lazarus Effect—lists $36.8 million in unsecured
debt for advertising. Its advertising agency is Carat USA, but contracts usually specify placements by the agency (Carat USA, in this case) are the financial obligation of the advertiser (Relativity). Otherwise, ad agencies would collapse whenever a client goes bust.
   The media and marketing vendors listed in Relativity’s bankruptcy (and amount owed) are Palisades Mediagroup ($5.2m), Technicolor’s Digital Cinema ($3.4m), Technicolor loan ($3.1m) Cinedigm ($1.9m), Google ($648,000), and National Cinemedia ($200,000), and also creative boutiques that make ads Buddha Jones ($607,988) and Creative Advertising Group ($300,000).
   The independent film sector is rough-and-tumble, so the bankruptcy is not a surprise. "It’s difficult to prosper in the hardscrabble independent sector today, but occasional films have achieved unbelievable riches, which keeps hopes alive," says the third editon of book Marketing To Moviegoers. "Relativity Media enjoyed a hit with action thriller Limitless, which rolled up $79.2 million in domestic box office in 2011 from a film that cost just $27 million to make."
   Relativity also accessed prints & advertising funding, which is specialized financing devoted just to marketing expenses in theatrical releases. P&A funder RKA Film filed a lawsuit claiming Relativity misappropriated RKA money earmarked for marketing expenses to instead pay general operating expenses; Relativity denies misconduct and countersued.
   Though not detailed, the dispute may be traced to P&A funds generally being the last money in and first money taken out. Thus, if funds were not spent on marketing, then they are not immediately eligible from recoupment from film rentals of theatrical release.
   “The major studios find traditional P&A funds too expensive given the studios’ ability to raise capital at low rates and the studios’ unwillingness to give outsiders a cut of downstream video and TV revenue,” says a chapter of book Marketing To Moviegoers devoted to explaining P&A funding. “However, hardscrabble indies, which have few other financing options, will consider daunting financial terms.”
   News reporting of Relativity’s road to bankruptcy has been surprisingly thin and lacking insight. The salient points are:
·Senior creditors strong-armed management to propose a quick sale of the film company in bankruptcy. Senior creditors often squabble, which slows a resolution, but not in this case.
·Senior creditor Anchorage Capital—a hedge fund—is a leading contender to buy Relativity because it can combine its theatrical distribution operation with major studio library MGM, in which it owns a 30% stake. MGM doesn't have a domestic theatrical distribution operation.
·Relativity’s assets are already heavily mortgaged, but it does have valuable foreign output sales deals and a domestic theatrical partner with Luc Besson’s film company EuropaCorp, which made the Taken movies that were distributed by 20th Century Fox.
·Relativity lists liabilities of $500 million to $1 billion, which is an eye-popper for an independent  film distributor (ranked a lowly #11 distributor year-to-date with a 1.1% market share, per Boxofficemojo). But its actual dollar obligations will certainly be far less; bankruptcy filings list all possible items, including future activity that will be curtailed and thus all expenses won’t be incurred.
·Relativity was a passive co-financer of major studio films with including Warner Bros., which some press reports erroneously suggest are Relativity films. They’re not. The major studios involved hold all valuable film distribution rights.
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