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AT&T Needs All Parts of Time Warner to Justify Acquisition

Despite AT&T’s long-standing assumption that its acquisition of Time Warner would go off without much of a regulatory hitch, it’s recently become clear that the company may have to divest parts of the business to receive the approval it needs. It’s therefore worth asking which of the parts of the Time Warner whole would be worth the most to AT&T.

The Turner business has been reported as the most likely to be forced out if AT&T is to gain approval for the merger. But it’s actually the most financially attractive of the three major segments at Time Warner, contributing more than half of its operating income for the last several years. By contrast, HBO contributes less than a third of the company’s operating income, and Warner Bros. just over 20%.

Turner’s outsized contribution is a result of its scale and profitability relative to the other two segments — it’s nearly as large as Warner Bros. from a revenue perspective and more profitable than the smaller HBO.

From a purely financial perspective, then, Turner would appear to be the part of Time Warner that AT&T should least be inclined to lose if forced to divest part of the business. But of course that’s not the only metric it should consider.

Another way to look at Time Warner’s business is by the revenue mix among content, subscriptions in its cable network business and advertising, which together account for 98% of its revenues.

AT&T’s motivation for the deal is to own more content as both a hedge and a complement to the massive video distribution business it owns already in the form of DirecTV and its AT&T U-verse TV service. As such, the more than 40% of Time Warner revenue that comes from content will obviously be a critical part that AT&T will want to keep.

Nearly 95% of Time Warner’s content revenue comes from Warner Bros. and HBO (the vast majority of it from Warners), with only around 5% coming from Turner. HBO owns the rights to considerable amounts of exclusive, original series and movies, but much of Turner’s most valuable content is licensed from sports leagues, not owned directly by the company. So from a pure content perspective, AT&T could likely live without Turner much more easily than it could without HBO or Warner Bros.

But Time Warner’s advertising revenue contributes approximately 15% of its total and comes almost exclusively from the Turner side of the house. Despite the broad secular headwinds around TV advertising, AT&T has made ad revenue a big focus since its acquisition of DirecTV, and has doubled down on the satellite provider’s investment in addressable advertising in particular. Some of the effort Turner has recently put into improving data and analytics around viewing of its channels could therefore be a useful complement.

Though Turner is less critical to AT&T’s original content ambitions, it accounts for more than half of Time Warner’s operating income, while losing either HBO or Warners would sacrifice original content that’s critical to AT&T’s hedging strategy. AT&T really needs all three parts of Time Warner’s business to make its strategy work.

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