Gabelli ABC Fund commentary for the second quarter ended June 30, 2015.
“Give a man a fish and you feed him for a day. Teach him how to arbitrage and you feed him forever.” – Warren Buffett
To Our Shareholders,
For the quarter ended June 30, 2015, the net asset value (“NAV”) per Class AAA Share of The Gabelli ABC Fund increased 0.8% compared with an increase of 1.2% for the Standard & Poor’s (“S&P”) Long-Only Merger Arbitrage Index. The performance of the Bank of America Merrill Lynch 3 Month U.S. Treasury Bill Index was 0.01%.
Gabelli ABC Fund Commentary
In the second quarter of 2015, global deal volumes totaled $1.4 trillion, a 63% increase from the first quarter of this year and a 40% increase over the same period last year. This strong quarter contributed to global deal volumes totaling $2.2 trillion for the first half of 2015, marking the strongest first half for mergers and acquisitions (M&A) since 2007. This surge was driven by sixty-two announced deals greater than $5 billion, which accounted for 50% of total volume in the first half. Additionally, the number of worldwide deals announced increased by 3% compared to the same period in 2014 and by 8% from the first quarter of 2015.
Geographically, cross border M&A increased 20% over the same period last year to $760 billion, accounting for 34% of total deal volume. Domestic U.S. activity increased 60% versus the first half of 2014 and totaled $1 trillion across 4,960 deals. European M&A increased by 9.8% over 2014 to $688 billion during the first six months of 2015. In addition, Asia Pacific (ex-Japan) deal volumes totaled $590 billion for the first half, a 74% increase over the first half of 2014. Japanese M&A also increased, up 9.2% over last year to $81.4 billion.
On a sector specific basis, the Energy and Power sector was the most active in the first quarter, likely a result of lower oil prices and attractive valuation within the space. Energy and Power accounted for 16% of announced M&A activity, with the Healthcare and Technology sectors rounding out the top three, accounting for 15% and 11% of announced M&A value, respectively.
The consistent increase in deal volume over the past few years illustrates the desire of companies to grow through M&A. With high stock prices to use as currency and low interest rates to finance these transactions, M&A activity should remain strong in the coming months. Additionally, speculation surrounding the Federal Reserve and the potential rise in interest rates persists, which should correlate positively with the spreads on deals and potentially provide better returns. The Gabelli ABC Fund should continue to benefit from the aforementioned factors and the continued increase in worldwide M&A.
Positions Closed in the Second Quarter of 2015
Aruba Networks Inc. is a California based provider of network access solutions for the mobile enterprise. On March 2, 2015, the company agreed to merge with Hewlett-Packard in a deal worth $3 billion, in which ARUN shareholders received $24.67 per share in cash. The transaction received all necessary approvals and closed on May 18, 2015. The Gabelli ABC Fund earned a 4.61% annualized return.
Kofax Limited is an Irvine, California based software provider that caters to a variety of industries. On March 24, 2015, Lexmark International Inc. announced that it would acquire Kofax in a merger worth $1 billion or $11 cash per share. The deal closed on May 21, 2015, after receiving regulatory and shareholder approval. The Gabelli ABC Fund earned a 4.49% annualized return.
Life Time Fitness Inc., based in Chanhassen, Minnesota, operates fitness and recreation centers in the U.S. and Canada. On March 16, 2015, Life Time Fitness announced that it would be taken private by an investment group led by Leonard Green & Partners and TPG Capital, along with LNK Partners and Bahram Akradi, Life Time’s Chairman and CEO. The transaction was worth $4 billion and structured as a merger, in which shareholders of Life Time Fitness received $72.10 cash per share. Following regulatory and shareholder approval, the deal closed on June 10, 2015 and was one of the larger domestic leveraged buyouts of the year. The Gabelli ABC Fund earned a 6.83% annualized return.
Riverbed Technology Inc. is a San Francisco, California based firm that develops and sells software to help firms improve the performance of their applications. On December 15, 2014, Thoma Bravo LLC and Ontario Teachers’ Pension Plan announced that they would acquire Riverbed for $21 cash per share in a $3.6 billion merger. The deal to sell the company was the culmination of a long and thorough process initiated by Elliott Management in mid 2013. The merger received all necessary approvals and closed on April 24, 2015. The Gabelli ABC Fund earned an 8.98% annualized return.
Salix Pharmaceuticals Ltd. is headquartered in Raleigh, North Carolina and a leader in the growing U.S. gastrointestinal product market. On February 22, 2015, Valeant Pharmaceuticals, a multinational specialty pharmaceutical company, offered to purchase Salix in a tender offer worth $13 billion or $158 cash per share. Sixteen days later, Endo International plc overbid its rival Valeant with a proposal to acquire Salix for $15.5 billion, comprised of $45 cash and 1.4607 shares of Endo stock for each share of Salix. Less than a week later, Valeant countered with an all cash tender valued at $173 per share, which was worth more than the value of Endo’s cash and stock offer at the time. After receiving over 50% of shares in the tender and obtaining regulatory approvals, the transaction closed on April 1, 2015. The Gabelli ABC Fund earned a 74.93% annualized return.
Talisman Energy Inc. is an international oil and gas exploration and production company based in Alberta, Canada. The company was initially approached by Repsol S.A., a Spain based international oil company focused on downstream assets, in July 2014. At that time, crude oil was approximately $100 per barrel. Despite protracted negotiations, an offer did not materialize at that time. Following further weakness in energy prices, talks between the two companies restarted and culminated on December 16, 2014 in an $8.00 per share cash merger, valuing the whole company at over $8.0 billion. The deal was approved by shareholders and regulators and closed on May 8, 2015. The Gabelli ABC Fund earned a 29.56% annualized return.
TRW Automotive Holdings Corp. is a Michigan based supplier of automotive systems and components, with a focus on active and passive safety applications. On July 10, 2014, TRW was the subject of speculation, later confirmed by the company, regarding a possible transaction with ZF Friedrichshafen AG of Germany. After months of negotiations and the divestiture of a joint venture by ZF to facilitate the transaction, a $105.60 per share cash merger deal was announced on September 15, 2014. The deal closed on May 15, 2015 after receiving shareholder and regulatory approval. The Gabelli ABC Fund earned a 4.33% annualized return.
Deals in the Pipeline at the end of the Second Quarter of 2015
Altera Corp. (1.6% of net assets as of June 30, 2015) ($51.20) is a global semiconductor company based