Ryan Kavanaugh May Make Believers out of Hollywood Yet

For most of the last five years, it seems, Hollywood’s favorite game has been handicap when – not if – Ryan Kavanaugh would come crashing down. Kavanaugh, who runs Relativity Media, is the 35-year old wunderkind who raised more than $8 billion from private equity investors since arriving on the scene in 2005. His company finances most of the movies made by Universal Pictures (GE) and several by Sony Pictures (SNE) as well. But Relativity has also been quietly becoming a production studio in its own right, and this weekend seems to have hit the big time. Its romantic drama Dear John scored big at the box office, generating a larger than expected $32.4 million opening weekend that made it the first film in nearly two months to knock Jim Cameron’s 3D space epic Avatar from the top rung of box office performers.

For Ryan Kavanaugh critics, and Hollywood is crawling with them, this can’t be good news. The whisper campaign has been that Kavanaugh is all show and now go, that he has used smoke and mirrors to make his numbers look good, and that investors would soon be lining up to sue the financier. Well, folks, is doesn’t look like that’s going to happen anytime soon. His slate deals with Universal and Sony have had both winners (Universal’s It’s Complicated) and losers (Sony’s The International) but no more or less than any other fund in town. But what Ryan Kavanaugh has right now is a bone fide hit. And, whether he’s saying it or not, odds are that he’s plenty happy to make some people eat their words.

Dear John, which stars young actors Channing Tatum and Amanda Seyfriend in a young love tear-jerker of a couple who find one another before an army soldier ships out, is among a group of films that Relativity is making on its own. (It’s a separate business from its financing of so-called “slate deals” with Universal and Sony.) And Dear John proved to be a huge hit with young women under 21, according to exit polls. Better yet, it was made for around $20 million, meaning that Kavanaugh and his investors will see some heady profits from the flick.

That’s the Kavanaugh model that folks seem to be missing while they focus their ire on the billion dollar financings he’s arranged for investors. Working from an office with 80-odd folks crammed into every nook and cranny of a smallish West Hollywood building, Kavanaugh is specializing in low-budget films like Dear John that he makes for a relatively small amount by offering stars a “back end” piece of the action instead of a large salary. That’s how he made the film Brothers, which starred Tobey McGuire and Natalie Portman, for around $20 million as well.

Yes, Brothers didn’t become a huge hit – grossing less than $29 million, but Relativity will make a smallish sum because of its small investment. and the money it got from selling off foreign rights. Kavanaugh also invested around $12 million in the mega-dud musical Nine that the Weinstein Company released last month. Kavanaugh likely lost most of the $12 million he invested in that flick.

But in Hollywood, the object is to stay in the game business long enough to have a winner. And folks, Kavanaugh has one of them to call his own now. Down the road, Kavanaugh almost certainly is contemplating taking Relativity Media public. His largest shareholder, New York based equity fund Elliott Management, has given him access to as much as $1 billion in equity and lines of credit and will need an exit strategy. And the two companies have clearly been looking for ways to expand the business, including being among those in the second round of bidders for debt-plagued MGM, which has a 4,100 film library that will provide cash flow for his company.

Who knows if he wins that bid. He’s also said to be looking at the former Miramax library that the Walt Disney Co. (DIS) seems to have put on the market. No, he may not get Miramax either. But Ryan Kavanaugh seems likely to be around for a lot longer than his critics would like.

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