Entertainment

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Since AT&T Inc. announced last month that it's expanding into television and movie content through a $108.7 billion takeover of Time Warner Inc., a lot of attention has been paid to HBO. It's considered Time Warner's crown jewel and is home to the hugely successful "Game of Thrones" show. But what's been truly impressive as of late (and somewhat overshadowed) are Time Warner's Turner cable networks.

On Wednesday, Time Warner reported results for the period ended Sept. 30. They showed that the Turner division -- led by TNT, TBS and CNN -- experienced yet another gain of more than 10 percent in affiliate fees. 

Head-Turner
Turner had a 12% jump in subscription revenue in the third quarter, which the company attributed to higher rates in the U.S. and international growth
Source: Bloomberg Intelligence

These fees are essentially the portion of your cable bill that the content makers take. The industry's biggest share of them go to Walt Disney Co.'s ESPN, followed by TNT, which airs scripted programs such as "Bones" and "Major Crimes," as well as certain NBA games. Turner's surge in affiliate-fee growth is largely thanks to new carriage agreements (the deals it negotiates with cable and satellite-TV providers), which are helping to offset declines in U.S. subscribers.

The other side of the revenue equation for cable networks is advertising money. With Americans so consumed by the turbulent U.S. presidential election, prime-time ratings for CNN are up 89 percent this year through September. The news network helped drive a 2 percent gain in Turner's overall advertising sales for the third quarter. 

Tuning In
Revenue at all of Turner's main channels is climbing:
Source: Bloomberg Intelligence, SNL Kagan

This all underscores just how valuable Time Warner is to an acquirer like AT&T, which is diving into the entertainment industry with no real experience and needs the best assets if it's going to be successful. 

Turner's strong results -- along with Warner Bros. studio's recent box-office successes such as "Suicide Squad" -- resulted in better-than-expected revenue and earnings for Time Warner overall. The company even raised its full-year earnings forecast to a range of $5.45 to $5.55 a share, meeting a goal CEO Jeff Bewkes set two years ago of achieving "close to $6 a share" of earnings in 2016. 

Arbitrageurs Have Taken Over
Time Warner shares were down slightly on Wednesday as investors remained focused on the AT&T merger. The stock trades at a significant discount to the offer price because of regulatory risks:
Source: Bloomberg

HBO, while also incredibly valuable, does look like it needs another hit show because the unit's growth is beginning to slow. That said, assuming AT&T gets the nod from regulators and completes the Time Warner deal, this larger, more-diversified entity will be in a better position to splurge on new original content for HBO without causing a disruption to the bottom line the way it might for Time Warner alone.

Time Warner's assets are proving they're worth the hefty price tag. The question is whether soon-to-be parent AT&T, a phone company new to the entertainment side of the business, can deliver a Hollywood ending. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net