The Gabelli ABC Fund letter to shareholders for the fourth quarter 2014.
To Our Shareholders,
For the quarter ended December 31, 2014, the net asset value (“NAV”) per Class AAA Share of The Gabelli ABC Fund increased 0.4% compared with an increase of 2.1% 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 for the quarter was 0.00%. See page 2 for additional performance information.
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The Gabelli ABC Fund: 2014 – A Year of “Two Shires”
In 2014, global deal volumes increased 47.4% to $3.5 trillion, marking the strongest year for worldwide mergers and acquisitions (“M&A”) since 20071. This surge was propelled by ninety-five deals in excess of $5 billion, more than double the number of comparably sized deals announced last year. In the fourth quarter, deal volume totaled $922.5 billion, an increase of 7% sequentially.
Geographically, there was $1.3 trillion of cross-border M&A during the year, an increase of 78% from 2013. Announced deal volume in the Americas remained robust, totaling $1.8 trillion, with a 47.8% increase over 2013. Of the fifteen largest deals in 2014, eight were in the U.S., accounting for just over $372 billion in total deal volume. European M&A volume continued to be strong in the fourth quarter and finished the year at $869.8 billion, an increase of 54.9%. Asia (ex-Japan) had its best year for deal volumes on record, with an increase of 59.4% from 2013 to total $716.2 billion for the year.
As in the previous two years, Energy & Power represented the most active sector this year, accounting for 16.6% of worldwide volume in 2014. Healthcare and Real Estate rounded out the top three most active sectors, representing 11.3% and 10.7% of global deal volume respectively.
Despite the high levels of deal making, there were many unique events in the M&A space, such as tax inversion legislation, leverage lending guidance, and changes in commodity prices, which increased the risks of deals but also created opportunities throughout the year. Two deals exemplifying 2014’s unique dynamics were Tyson Foods Inc.’s tender for The Hillshire Brands Company and AbbVie Inc.’s acquisition of Shire plc (0.5% of net assets as of December 31, 2014). What started as Hillshire Brands (HSH) acquiring Pinnacle Foods Inc. for cash and stock evolved into a bidding war for Hillshire Brands. In early May, Hillshire announced that they would be acquiring Pinnacle Foods, but, by the end of the month, Hillshire went from the acquirer to the target when Pilgrim’s Pride Corporation announced a $45 cash per share offer for Hillshire. Two days later, Tyson Foods countered with a bid of $50 per share, and the bidding war was underway. Pilgrim’s Pride came back with a $55 bid, and eventually the auction went to sealed bids. Tyson Foods (TSN) emerged victorious with a $63 cash tender offer, paying a premium of 80% to Hillshire’s trading price before its initial deal with Pinnacle, and a premium of 40% to Pilgrim Pride’s initial offer. This deal highlighted the importance of questioning the strategic rationale of deals, the risks of hedging the stock portion of deals when the acquirer becomes the target, and the high rewards of bidding wars.
In contrast to the aforementioned deal, the AbbVie (ABBV) and Shire merger did not unfold as arbitrageurs had hoped. In July, after rejecting a series of proposals from AbbVie, Shire agreed to sell itself to them for $55 billion, in what would have been the largest U.S. tax inversion. The government vehemently condemned these deals, and eventually the IRS and Treasury Department implemented rules to thwart tax inversions. Shortly after the IRS and Treasury published new guidance in September, AbbVie’s CEO reiterated the firm’s commitment to the deal. In hindsight, this comment was shocking, as just a few weeks later, the acquisition was terminated and AbbVie walked. This sent a shock through the entire M&A space, resulting in a “risk-off” mentality that negatively impacted the stock prices of arbitrage names and widened spreads.
As 2015 begins, many of the same factors that fostered elevated levels of M&A activity in 2014 remain present. High levels of cash, a rising stock market, and low interest rates create an environment that is conducive to M&A by providing corporate buyers with favorable options for deal financing. We believe that there will be few, if any, inversions in the pipeline, which should hopefully eliminate the risks that materialized in the Shire deal. Furthermore, as the Federal Reserve contemplates raising interest rates, it should be noted that such an increase would be expected to increase the spreads on deals, hence providing better expected returns. This is due to the fact that spreads are comprised of the risk-free rate, plus a component related to the risks inherent to the deal. The Fund should continue to benefit from the above factors and the acceleration in worldwide M&A.
The Gabelli ABC Fund: Closed Deals
Annie’s Inc. (BNNY), based in Berkeley, California, is a natural and organic food company with a focus on pastas and snacks. On September 9, 2014, General Mills, Inc. announced it would acquire Annie’s for $820 million to expand its presence in the organic food space. The $46 tender offer was contingent upon a 50% minimum and receiving U.S. regulatory approval. The deal closed on October 21, 2014, after clearing the above hurdles. The Fund earned a 2.19% annualized return.
Bally Technologies Inc. is a Las Vegas, Nevada based designer and manufacturer of gaming machines and casino management systems. On August 1, 2014, the company received an $83.30 cash merger offer from New York based Scientific Games, a lottery operator and gaming machines manufacturer. The deal, which is one of several recently announced in the industry, values Bally Technologies at $5.1 billion and received all final approvals in November. The merger was completed on November 21, 2014. The Fund earned a 21.25% annualized return.
Concur Technologies, Inc., based in Bellvue, Washington, is a provider of cloud-based corporate travel software. On September 18, 2014, SAP SE (SAP), the German software giant, announced that it would acquire Concur for $129 cash per share. This merger valued the company at $8.3 billion. After receiving the requisite regulatory and shareholder approvals, the deal closed on December 4, 2014. The Fund earned a 7.14% annualized return.
Indesit Company SpA is an Italian manufacturer of household appliances with sales in Europe, Latin America and Asia. After several months of speculation, on July 11, 2014 Whirlpool Corp. – a Michigan based global manufacturer of home appliances – offered €11.00 cash via a tender to shareholders of the company. The transaction valued Indesit at €1.2 billion and came with the support of the Merloni family, which controlled approximately 60% of Indesit. The tender offer was approved by the European Union and Italian antitrust commissions and successfully concluded on November 28, 2014. The Fund earned a 3.76% annualized return.
LIN Media LLC is a Providence, Rhode Island based multimedia company with forty-three television stations and seven digital channels in over twenty U.S. markets. On March 21, 2014, Media General Inc. (0.1% of net assets as of December 31, 2014), another broadcasting company, announced that it would acquire LIN in a $2.6 billion merger. Each shareholder of LIN could elect to receive $27.82 in cash or 1.5762 shares of the new holding company, subject to proration. On August 20, 2014, LIN and Media General announced an amendment to the merger agreement, which reduced the merger consideration to either $25.97 in cash or 1.4714 shares of the new holding company, after an affiliation change occurred at one of LIN’s stations in August. The companies also announced the planned divestitures of stations in five markets to comply with regulatory rules. The deal closed on December 19, 2014 after both companies received shareholder and U.S. regulatory approvals. The Fund earned an 11.66% annualized return. Nobel Biocare Holding AG, based in Zurich, Switzerland, is a manufacturer of premium dental implants and related equipment. On July 29, 2014, Nobel Biocare confirmed that it was in preliminary discussions with third parties that had expressed interest in acquiring the company. On September 15, 2014, an official deal was disclosed with Washington, D.C. based Danaher, a leading industrial company with exposure to the medical device industry. Nobel Biocare shareholders received 17.10 swiss francs for each of their shares in a tender offer. The transaction closed on December 11, 2014, after the companies received regulatory approval. The Fund earned a 1.61% annualized return.
Ziggo NV is one of the main providers of cable TV and telecommunications services in the Netherlands. On January 27, 2014 John Malone’s Liberty Global (LBTYA) (0.6%) offered to acquire the company for €11.00 cash plus 0.2282 shares of Liberty Global A stock and 0.5630 shares of Liberty K stock. On the date of the announcement, the total consideration stood at €35.53 per Ziggo share or approximately €7.0 billion. The deal, which represented another step in Malone’s strategic plan to increase its exposure to the European media and entertainment market, underwent a lengthy regulatory approval process with the European Commission and Dutch antitrust regulators which concluded in October of 2014. The tender offer successfully closed on November 19 and shares of the company were delisted on December 22. The Fund earned a 34.50% annualized return.
The Gabelli ABC Fund: Deals in the Pipeline
Chiquita Brands International Inc. (1.3% of net assets as of December 31, 2014) ($14.46) is a Charlotte, North Carolina based global fruit and vegetable company specializing in the production and distribution of bananas, packaged salads and healthy snacks. In March of 2014, the company disclosed an “all stock” transaction to acquire Irish competitor Fyffes plc – a producer of bananas, pineapples and melons. The transaction was countered by Florida based agribusiness and fruit juices company Cutrale Group in August. With the support of Brazilian conglomerate Safra Group, Cutrale offered $600 million or $13 per share for Chiquita. Following negotiations, Chiquita, Cutrale, and Safra reached an agreed upon deal on October 17, 2014, for $14.50 per share or $700 million. The tender offer expired on January 5, 2015, and is expected to close promptly.
Cubist Pharmaceuticals Inc. (2.1%) ($100.65 ) is a Lexington, Massachusetts based pharmaceutical company engaged in the development and commercialization of antibiotic treatments. On December 8, 2014, Merck & Co. offered to acquire Cubist in a cash tender offer valued at $7.8 billion, a premium of approximately 37% to the company’s previous valuation. The tender offer, which requires acceptance by a majority of Cubist shareholders, is currently set to expire on January 20, 2015. The offer is further subject to antitrust approvals in the United States, Austria, and France. The deal is expected to close in the first quarter of 2015.
International Game Technology (2.2%) ($17.25), based in Las Vegas, Nevada, is a global leader in the design and manufacturing of gaming equipment and related services. The company confirmed on June 16, 2014 that it was in the process of evaluating strategic alternatives. On July 16, 2014, the company entered into a merger agreement with lottery industry leader GTECH SpA for a cash and stock consideration of $18.25 per share. The deal values International Game Technology at $6.4 billion. The transaction is subject to shareholder approvals at both companies and approval from gaming commissions in twenty-two jurisdictions, several of which have already approved the deal. The transaction has received U.S. antitrust clearance and is expected to close in the first half of 2015.
Jazztel plc (1.7%) (Chiquita Brands– $15.19) is a Spain based telecommunications service provider offering landline, fixed broadband, and mobile telephony services. On September 15, 2014, the company received a €13 per share cash tender offer from France based telecommunications provider Orange SA. The deal, which values Jazztel at €3.3 billion, is subject to regulatory approval and a majority of the minority shareholders must tender. The transaction is expected to close in the first half of 2015.
Protective Life Corp. (3.7%) (Chiquita Brands$69.65) is a Birmingham, Alabama based life insurance firm. On June 2, 2014, Dai-Ichi Life Insurance Company announced it would acquire Protective for $70 cash per share in a $5.7 billion merger. The merger expands Dai-Ichi, the second largest life insurance firm in Japan, into the lucrative U.S. market.
The deal is expected to close on February 1, 2015 and has already received shareholder approval. The firms are currently waiting on the regulatory approvals.
Riverbed (1.8%) ($20.41) is a San Francisco 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 they would acquire Riverbed for $21 cash per share in a $3.6 billion merger. The deal was the culmination of a long and thorough process to sell the company initiated by Elliott Management in mid 2013. The merger is subject to shareholder and regulatory approvals and is expected to close in the first half of 2015. Safeway Inc. (2.3%) (SWY – $35.12 – NYSE) is a food and drug retailer based in Pleasanton, California. The company has over 1,300 stores across the United States. On March 6, 2014, Albertsons, controlled by Cerberus Capital Management, L.P., in conjunction with an investor group announced it would acquire Safeway for $9 billion. Safeway distributed Blackhawk Networks Inc. (0.2%) shares to shareholders in April as part of the transaction. In addition, upon closing in January of 2015, shareholders will receive $32.50 in cash plus $2.38 related to the sale of Safeway’s real estate assets. Shareholders will also receive a contingent value right (CVR) related to the value and sale of Safeway’s minority stake in Casa Ley, a Mexican grocer, and roughly $0.07 per share held for contingent liabilities related to the sale of the real estate assets.
Sapient Corp. (3.0%) ($24.88) is a technology focused marketing and consulting firm based in Boston, Massachusetts. On November 3, 2014, Publicis Groupe announced it would acquire Sapient for $25 cash per share in a $3.7 billion tender. The deal helps diversify Publicis into the digital marketing arena. On December 24, 2014, and again on January 8, 2015, the tender offer was extended as the companies were waiting on approval from the Committee for Foreign Investment in the U.S. The tender is now expected to end on January 22, 2015, with a closing in early 2015.
Talisman Energy Inc. (2.2%) ($7.83) is an international oil & gas exploration and production company based in Alberta, Canada. The company was initially approached by Repsol SA, a Spanish international oil company focused on downstream assets, in July of 2014 when 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 cash merger valuing the whole company at over $8.0 billion. The deal is conditioned on an affirmative vote of 66.6% of Talisman shareholders and is subject to several antitrust approvals in the United States, Canada, and Europe. The merger is expected to close in the second quarter of 2015.
TRW Automotive Holdings Corp. (4.4%) ($102.85) 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 merger is subject to approval from a majority of TRW’s shareholders as well as antitrust approvals in several jurisdictions. The deal is also subject to the Committee on Foreign Investment in the United States (CFIUS) review and is expected to close in the first half of 2015. January 12, 2015
Note: The views expressed in this Shareholder Commentary reflect those of the Portfolio Manager only through the end of the period stated in this Shareholder Commentary. The Portfolio Manager’s views are subject to change at any time based on market and other conditions. The information in this Portfolio Manager’s Shareholder Commentary represents the opinions of the individual Portfolio Manager and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Views expressed are those of the Portfolio Manager and may differ from those of other portfolio managers or of the Firm as a whole. This Shareholder Commentary does not constitute an offer of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this Shareholder Commentary has been obtained from sources we believe to be reliable, but cannot be guaranteed.
FOR THE BENEFICIAL OWNERS
The Gabelli ABC Fund remains open to new investors with the following characteristics: Direct Ownership – Class AAA (GABCX)
• Purchases may be made through G.distributors, LLC or directly through the Fund’s Transfer Agent or through brokers that have entered into selling agreements specifically with respect to Class AAA Shares; and
• The minimum initial investment is $10,000; and
• Investment accounts must be registered in the beneficial owner’s name; and
• The Fund may involuntarily redeem shares through brokers or financial consultants in omnibus and individual accounts where the beneficial owner is not disclosed.
Ownership Through Intermediaries – Advisor Class (GADVX)
• The Advisor Share Class is available through brokers or financial intermediaries that have entered into selling agreements with G.distributors, LLC, specifically with respect to this share class; and
• The minimum initial investment is $10,000.
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