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Discussing the spin-off of BEAM, Fortune Brands, and Sara Lee, with Mario Gabelli, Gamco Investors CEO & CIO, and the outlook on M&A in 2012.

Segment #2 is here.

Video and text below:

all right, let’s get mario is here, mario gabelli, get somethoughts, joining us now, gamco chief investment officer, always interests theses about a lot of different subjects. we don’t revisit a lot of the stuff you talk about sometimes, and do you remember the last time you were on? okay. do you remember some of your main themes then? no, give me them.i don’t know. you looked them up. no, i haven’t. you always like fortune brands. in terms of where — some of some of your individual, you have great stories for individual — stocks, yeah, but what we do is not complicated, and that is what’s the world going to look like over the next ten years and then we do stock analysis covering sectors globally so if it’s something you drink we follow it anywhere in the world and go in and look at eachcompany. for example how big is the beer industry globally, how big is the booze big deployablely and carbonated soft drink and water and so on and look at each individual company so when we look at companies we then look at a graham and dodd approach, gather the data, raid the data, project the data, interpret it, look at evaluation and catalyst. as an example i started following american brands probably 30, 40 years ago and became — it was american brands so they have a legacy ofspinning off companies, splitting them up. fast forward we’re looking at spinning off the companies, spin-off company a, beam, bourbon, $300 billion business, distilled spirits, booze, and $8 billion approximately, more or less is bourbon and who would want to own bourbon in their portfolio and they spun offfortune brands home and hardware. we said housing is at thebottom. the company is doing well at the bottom of a cycle. what can it do as the cycle improves? we bought both pieces. bean is 56 and fortune brands is 21. 56 plus 21 is 76. it’s a living.over the next five years, over the next five years what is going to happen to both of the businesses? financial engineering — joe, go back. in the 1960s, the mantra ofcong. you had the economic cycle every four years, buy companies that are lagers and leaders in the cycle, put them together. smooths it out. in the ’80s it was energize lazy assets doing leveraged buyouts, in the ’90s, dot-comand whatever it was. today how do you take a company and take its capital and move it to its highest rate of return and splitups are an example. we look at finding the company that spun off and saying is this attractive? as an example, joe, pediatric nutrition, better known as baby food, infamil, bristol-myers says it doesn’t belong in our portfolio, did an ipo at $24 and shrink at $39.40. we’re a similac family.switch. no, my kids are 12 and 9 now. start again. mario, when you give me that scenario on the meade on the beam, you said you start by making a top-down call and do the company analysis. that is correct. when you look at something like beverages or you look at consumption, what is the top-down called? gary, the top-down call was that in november of 1989, the berlin wall came down. that signaled the allocation ofcapital that the best of all ways was capitalism versus karl marx, versus adam smith. so as a result of that, we said over time you’ll have more consumers coming into the globalmarketplace and the consumers in this particular case we hadn’t focused on brazil but primarily china and india and having been in china in early 1981, henry kissinger’s brother doing a trip, they had a habit of doing two things, drinking. went to hong kong or happy valley they knew they could do gambling so we were biased and didn’t want to say everyone does that.we knew you’d have a growth in the marketplace and then you had this aspirational value so what was the top brand and whatdidn’t you have that americans had? we do have that, but that meant that we had an analyst that goes out and visits the companies. guy in shanghai our beverage analyst in the united states, living there for the last five years. if you take tea he follows the tea companies. that’s how it works. now a lot of those — that was one example. beam is $56. is there a margin of safety in the stock, do we still want to own it? yes. will it be brought as part of someone else? yeah, i think it’s got a neat,little market capital relative to some of the other companies, and they want to have bourbon in their portfolio. okay, how about –that’s just one example. sara lee i came here before with single serve coffee. you did, that’s right. if you want to revisit oldstories, sara lee, brenda barnes started selling off businesses,started buying back stock, shrunk their capitalization from like, i’m cupping numbers, 800 million to 592 million shares and announced she had to retire and splitting up the company.coffee co in europe and a business everybody would like tohave in the united states, ball hotdog, jimmy dean for bacon forbreakfast. now a company that is $21.40, who is going to want to buy those pieces? let’s go back, gary, you remember it&t, jenin, a great conglomerate. so recently they just spun off three companies, one of them being xylem, one of them is it&t and another one is xcel. xylem is run by a terrific team and i try to buy that for the right place. you had all of your fracing stuff, safe ways to do fracing. the achilles heel of the natural gas and unconventional drilling is the control of water, because if one entity makes a mistake, deliberately or otherwise, the press, there will be certain groups that will jump on this and say wow and there was a little earthquake in ohio that was caused by water coming in. we as a country have to, you know the story, i don’t want to get into it. that was one of your things, you’re looking all across the spectrum of small companies that deal with the water issues for fracing, right? we have one very basic need. we have to reduce our debt. we have to cut down on ourimport bill. we cannot transfer our wealth to the chinese. they have of the $15 trillion of wealth they control $1.3 billion or 25% of the external bonds that are held. who knows what’s going tohappen? there’s a new ceo coming into that country just like we’re having elections in a lot of parts of the world. 11? 12, november. xi? i pronounce his name eleven because it’s xi.looking at that, in any event, water is for agriculture. water is needed to be where it has to go in terms of the delivery of quality of water, sewage, waste water disposal, how do we participate in the next ten years? we’ve been anying about this for ten years. aside from becky, everyone else in the world is aging so you have this aging population and when you age, joe, you need a new hip, a new knee. for example today japanese company announced they’re buying zoe medical and you’re going to see a lot of — will you give us water names? you want water? you’re talking about all this stuff and haven’t told me anything i can buy. xyl over the next ten years i have no idea. xyl? the symbol of xylem, market cap of about $3 billion. there are companies that will go into a into a fracing location. when you frac you put a platform on, there could be three or four holes, wells drilled out of that platform. when do you that, you need 3 million to 5 million gallons of water to do its thing and 1.5 million to 2 million come back and after the well is produced a continuous flow of water. you bring it to the site, retrieve it, put it back intothe system and that requires intensity and gorman

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