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 in San Jose, California. On June 1, 2015, Intel announced that it would acquire Altera for $54 per share in an all cash merger valued at approximately $16.7 billion. The deal will further expand Intel’s presence in data centers. The transaction is expected to close in six to nine months, after receiving approval from shareholders and regulators.
Catamaran Corp. (2.7%) ($61.08 is an Illinois based provider of pharmacy benefit management services and technology solutions. On March 30, 2015, the company agreed to combine with OptumRx, UnitedHealth Group’s independent pharmacy care services business. OptumRx will acquire Catamaran for $61.50 in cash per share. The acquisition requires regulatory and shareholder approval and is expected to close in the fourth quarter of 2015.
DealerTrack Technologies Inc. (3.6%) ($62.79), based in Lake Success, New York, is a web-based software solutions and services company with a focus on the automotive retail industry. On June 15, 2015, Cox Automotive Inc., a provider of marketing and e-commerce solutions to the automotive industry, announced it would acquire DealerTrack for $4 billion or $63.25 per share through a tender offer. After receiving shareholder and regulatory approval, the transaction is expected to close in the third quarter of 2015.
Hospira Inc. (4.0%) ($88.71) is the world’s leading provider of injectable drugs and infusion technologies and a global leader in biosimilars, based in Lake Forest, Illinois. On February 5, 2015, the company received a $90 per share cash merger offer from Pfizer Inc., valuing Hospira at $15.2 billion. The transaction, subject to regulatory and shareholder approval, is expected to close in the second half of the year and will create a leading global injectables business.
Informatica Corp. (1.7%) ($48.47) is a provider of enterprise data integration software and services based in Redwood City, California. On April 7, 2015, the company announced that it would be acquired by a company controlled by the private equity firm Permira and the Canada Pension Plan Investment Board (CPPIB). The merger is worth approximately $5.3 billion, and Informatica shareholders will receive $48.75 in cash per share. The transaction has received shareholder approval and is set to close in the third quarter of 2015 subject to regulatory approvals and other closing conditions.
Omnicare Inc. (2.3%) ($94.25) is a Cincinnati, Ohio based pharmaceutical service provider. On May 21, 2015, CVS Healthcare Corp. announced that it would acquire Omnicare for $98 cash per share in a $13 billion merger. Omnicare expands CVS into the long term care pharmacy dispensing channel. The deal is subject to regulatory and shareholder approvals and expected to close by year end.
Pall Corp. (2.9%) ( $124.45), based in Port Washington, New York, manufactures and markets filtration, separation, and purification products. On May 13, 2015, the company announced that it had been acquired by Danaher Corp. for $127.20 per share in cash, or $13.8 billion. The transaction requires shareholder and regulatory approval and is expected to close by year end.
Sigma-Aldrich Corp. (2.9%) ($139.35) is a leading life science and technology company that manufactures and distributes more than 230,000 chemicals, biochemicals, and other essential products to more than 1.4 million customers globally. On September 22, 2014, Merck KGaA, a German multinational pharmaceutical and chemical company, announced that it would acquire Sigma-Aldrich for $16.7 billion, or $140 cash per share. The deal has already received shareholder approval, and there are currently regulatory approvals pending in the U.S. and overseas. The merger is expected to close in mid 2015.
TNT Express NV (1.1%) ($8.48/€7.61), based in the Netherlands, provides express delivery services to businesses and consumers across the world. On April 7, 2015, the company agreed to sell itself to FedEx Corp. in a tender offer for €8 cash per share, or €4.4 billion. The deal is subject to regulatory approval and a minimum shareholder vote, and it is expected to close in the first half of 2016.
July 7, 2015
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