Gabelli Value 25 Fund letter to shareholders.
To Our Shareholders,
For the quarter ended March 31, 2014, the net asset value (“NAV”) per Class A Share of The Gabelli Value 25 Fund Inc. decreased 1.4% compared with an increase of 1.8% and a decrease of 0.2% for the Standard & Poor’s (“S&P”) 500 Index and the Dow Jones Industrial Average, respectively. See page 2 for additional performance information.
Gabelli Value 25 Fund: An Unchanged Process in an Ever-Changing World
Stocks rose modestly in the first quarter of 2014, despite the largely negative geopolitical and macroeconomic events that dominated the headlines.
The long term implications of the Russian Federation’s annexation of Crimea are still yet to be determined. Will Russia make a similar move in other provinces in Ukraine or attempt to reclaim other parts of the former Soviet Union that are now independent countries? What will be the economic impact to Russia and its main trading partners? The short term effect has been for the Russian stock market to decline 9%, along with a 6% decline in the Russian ruble.
Other emerging market currencies also fell in the first quarter, most notably the Venezuelan bolivar, which underwent a massive “stealth” devaluation when the embattled government introduced a secondary currency exchange market known as SICAD II; the Argentine peso (–18%) and the Brazilian real (–4%) also declined during the quarter. U.S. based multinationals with significant operations in these markets will have a headwind to reported results this year, as profits in these countries must be translated back into U.S. dollars at a lower exchange rate. We also are watching developments in other important markets closely, including China dealing with a slightly slower but perhaps more sustainable growth rate and Japan continuing its attempt to re-inflate under the leadership of Prime Minister Shinzo Abe and Governor of the Bank of Japan Haruhiko Kuroda.
Back in the U.S., the economy continues to expand – albeit slowly. GDP growth was 2.6% in the fourth quarter of 2013, and unemployment held relatively steady at 6.7% at the end of March 2014. Much of the country experienced nearly unprecedented cold temperatures, as well as several severe snowstorms, for much of the first quarter. While the reduced consumer spending and cancelled travel that resulted may have an impact on first quarter earnings, we expect that most expenditures will ultimately be delayed rather than eliminated altogether.
Janet Yellen was sworn in as Chair of the Board of Governors of the Federal Reserve System during the quarter. While we expect Ms. Yellen to continue most of the policies of her predecessor, we note that she also seems committed to continuing the so-called “taper,” as the pace of open market asset purchases was reduced to $55 billion per month starting in April, from $85 billion in December 2013. This gradual withdrawal of stimulus has not led to a decline in asset prices – yet.
Gabelli Value 25 Fund: Deals, Deals, and More Deals
On a positive note, deal-making activity increased substantially during the first quarter, with worldwide mergers and acquisitions (M&A) value growing 36%, net of competing bids, to $756 billion. Within these figures, we note that cross border transactions were up 86% to $245 billion. We believe that we will see more of these kinds of transactions as the “Fifth Wave” of takeover activity since World War II continues to build momentum.
In January, Fund holding Beam, Inc. (2.4% of net assets as of March 31, 2014) agreed to be acquired by Suntory Holdings, a leading Japanese beverage company, for $83.50 per share in cash. The deal price was a 25% premium to BEAM’s $67 closing price and represents just over 18x our 2014 EBITDA estimate of approximately $850 million. While the multiple is fairly full, it is consistent with our estimate of Private Market Value, and we believe it is appropriate for a high quality asset such as Beam, with great brands, margins, growth prospects, pricing power, and distribution. The transaction is expected to close in the second quarter. Two media holdings were also the subject of M&A during the first quarter. After being pursued through most of 2013 by Charter Communications, Time Warner Cable (0.3%) agreed to be acquired by Comcast (0.9%) in an all stock transaction. The combined company would serve over 30% of all U.S. pay-television households and thus has drawn close regulatory scrutiny. We believe the odds favor a Comcast closing on current terms early in 2015. Another bidding war took place across the Atlantic, as French media and telecom conglomerate Vivendi (1.2%) auctioned its wireless subsidiary, SFR. Cable entity Numericable and wireless competitor Bouygues submitted competing proposals; in April, Vivendi chose to move forward with Numericable, allowing Vivendi to continue its transition to a pure content company and providing it with significant excess capital, which we expect will be returned to shareholders.
With extremely attractive financing available to acquirers, we expect deal activity to continue to increase over time, albeit not in a linear fashion.
Gabelli Value 25 Fund: Let’s Talk Stocks
The following are stock specifics on selected holdings of the Fund. Favorable earnings prospects do not necessarily translate into higher stock prices, but they do express a positive trend that we believe will develop over time. Individual securities mentioned are not necessarily representative of the entire portfolio. For the following holdings, the percentage of net assets and their share prices are presented as of March 31, 2014.
American Express Company (NYSE:AXP) (2.5% of net assets as of March 31, 2014) (AXP – $90.03 – NYSE) is the largest closed loop credit card company in the world. The company operates its eponymous premiere branded payment network and lends to its largely affluent customer base. American Express has 107 million cards in force and over $67 billion in loans, while its customers charged nearly $950 billion of spending on their cards in 2013. The company’s strong consumer brand has allowed American Express to enter the deposit gathering market as an alternate source of funding, while the company’s affluent customers have picked up spending. Longer term, American Express should capitalize on its higher spending customer base and continue to expand into other payment related businesses like corporate purchasing, while also growing in emerging markets. Similarly, the company is looking at the growing success of social media as an opportunity to expand its product base and payment options.
The Bank of New York Mellon Corporation (NYSE:BK) (1.0%) (BK – $35.29 – NYSE) is a global leader in providing financial services to institutions and individuals. The company operates in over one hundred markets worldwide and strives to be the global provider of choice for investment management and investment services. As of December 31, 2013, the firm had $27.6 trillion in assets under custody and $1.6 trillion in assets under management. Going forward, we expect BNY Mellon to benefit from rising global incomes and the cross border movement of financial transactions.
CBS Corporation (NYSE:CBS) (4.4%) (CBS – $61.89 – NYSE) operates the CBS television network and the premium cable network Showtime, owns 29 local television stations and 130 radio stations, and is the third largest international outdoor advertising network. We believe CBS has a number of opportunities to generate incremental non-advertising revenue from the sale of existing content to online video distributors (OVDs) and the retransmission