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Volume 23 No. 24
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Relativity Sports eyes next step

Company moves on under new structure

While Relativity Media was in the midst of a very public Chapter 11 bankruptcy protection filing just a few weeks ago, Relativity Sports was quietly undergoing an ownership shift.

Just two days before Relativity Media filed for Chapter 11, an entity controlled by billionaire and Pittsburgh Penguins co-owner Ron Burkle and Colbeck Capital appears to have exercised options to buy half of the studio’s interest in Relativity Sports.

YC Athletics Holdings — Y for Burkle’s Yucaipa Cos. and C for Colbeck Capital — exercised warrants to buy 50 percent of the equity in an entity called Sports Management on July 28.

Two days later, on July 30, Relativity Media and 143 of its affiliate companies filed Chapter 11 petitions in federal bankruptcy court in New York. But Relativity Sports, which was launched in the summer of 2012, was not among the entities seeking protection.

The filing shook up Hollywood, as Relativity Media’s bankruptcy has major implications for the entertainment industry and the studio has laid off 75 full-time employees.

But no employees at Relativity Sports lost their jobs, and sources close to the studio and the sports division insist that there has been no impact on the sports company.

“Relativity Sports is a thriving business and the Chapter 11 bankruptcy of Relativity Media has zero effect on Relativity Sports,” said a source close to the studio.

Relativity Media has an estimated 25 percent interest in Relativity Sports, a Relativity Sports source said. Relativity Sports is not in bankruptcy, but a 97-page declaration of Relativity Media’s Chief Restructuring Officer Brian Kushner reveals some information about the sports company that was not previously known.

Kushner’s declaration includes a chart that shows the sports division comprises nine different entities. The action taken by Burkle and Colbeck Capital on July 28 gave them 50 percent of Sports Management, with the other 50 percent owned by Relativity Media. “Sports Management, in turn, owns 59.71% of Sports LLC, with the remaining 40.29% of Sports LLC owned by certain individuals and other entities,” Kushner stated in the sworn declaration. Those other entities and individuals are said to include senior executives and senior sports agents at Relativity Sports, sources said.

It is believed that Colbeck Capital and Burkle’s Yucaipa now have the largest, albeit not a majority, stake in Relativity Sports, of more than 30 percent. The ownership stakes of agents and executives is not known.

Although the filing by Kushner sheds light on the ownership structure, exact ownership percentages could not be determined, as different individuals have the ability to exercise warrants for equity stakes in different sports entities.

NFL agent Roosevelt Barnes, as well as Burkle’s Yucaipa Cos. and Colbeck Capital, own additional warrants that can be exercised in the sports group in the future.

Relativity Sports, Relativity Media, Yucaipa Cos. and Colbeck Capital officials would not comment for this story.
Burkle’s Yucaipa has been a partner in Relativity Media since 2011.

Lawrence Ponoroff, a bankruptcy law professor at the College of Law at the University of Arizona, said that the bankruptcy filings by Relativity Media and related entities is especially complex. “It is very complicated by virtue of the fractionalized corporate structure,” he said.

Ponoroff observed that YC Athletic Holdings’ exercise of warrants diluted Relativity Media’s ownership stake in Relativity Sports and the additional warrants could dilute it further.

Due to Relativity Media’s bankruptcy filing, there are several potential outcomes for its minority equity interest in Relativity Sports.

The bankruptcy court is expected to hold an auction for the assets of Relativity Media, which include the company’s film and television studio, by October of this year. Relativity Media’s minority stake in Relativity Sports could be sold along with those assets. The stake could also be sold separately to another party, including the current investors in the sports agency.

San Francisco Giants pitcher Madison Bumgarner
Competitors in the sports industry have privately expressed disbelief that Relativity Media’s Chapter 11 filing would have no effect on Relativity Sports.

Since it was launched three years ago, Relativity Sports, under CEO Happy Walters, has engaged in an aggressive acquisition strategy that has landed major MLB, NBA and NFL player representation practices, with a number of high-profile athletes. San Francisco Giants pitcher Madison Bumgarner, Houston Rockets center Dwight Howard and Seattle Seahawks running back Marshawn Lynch are among the agency’s clients.

The agency represents more than 300 MLB, NBA and NFL clients and employs 77 people, including 20 agents, according to Kushner’s declaration.

Relativity Sports, since its inception, has touted itself as specifically connected to entertainment, using its movie and television studio to actively and successfully recruit athletes.

It is not clear what connection Relativity Sports will have to Relativity Media’s television studio and movie studio. Although employees have been laid off, the studios are still operating.

Relativity Media provides Relativity Sports with certain overhead and support services, as well as office space, through a service agreement, according to Kushner’s declaration. Relativity Media and Relativity Sports share one top executive in Walters. In addition to being CEO of Relativity Sports, he is co-president of Relativity Media, and it is not clear what his roles will be with the two companies in the future.

The main assets of Relativity Sports are the athlete clients, which are tied to the agency through contracts they signed with individual agents. Under the rules of the major players associations, athletes sign with individual agents who are certified by the union, not with companies or agencies.

Relativity Sports agents are tied to the agency through their own employment contracts, although the status of those contracts is not known.

Generally speaking, Chapter 11 filings provide protection to the debtor, not the employees or other entities with contracts with the debtor, Ponoroff said.

In any case, the agents are employees of Relativity Sports, which is not under bankruptcy protection, so many see it as business as usual for now at Relativity Sports.

“Relativity Media’s Chapter 11 filing should have no meaningful impact on the day-to-day operation of Relativity Sports unless and until it is established there was any improper dealings between media and other entities concerning the ownership and operation of Relativity Sports,” Ponoroff said.