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The Gabelli ABC Fund Merger and Arbitrage – “The Deal Fund” Shareholder Commentary Q3

Holly LaFon

Holly LaFon

277 followers

To Our Shareholders, For the quarter ended September 30, 2013, the net asset value ("NAV") per Class AAA Share of The Gabelli ABC Fund increased 1.2% compared with the increase of 0.7% for the Standard & Poor's ("S&P") Long- Only Merger Arbitrage Index. The performance of the 3 Month U.S. Treasury Bill Index for the quarter was 0.02%. See page 2 for additional performance information.

Deal Environment and Outlook

After a weaker second quarter, global deal volumes recovered in the third quarter. Total deal volume was $703.2 billion, up 17% year over year and 55% sequentially. For the first nine months of this year, M&A volumes increased 2% versus 2012. Several large deals (those valued over $5 billion) were announced this quarter, and the trend of private equity buyers participating in transactions continued. Specifically, private equity backed M&A increased 16% versus the first nine months of 2013. These are both very encouraging signs for deal making, as they indicate an appetite in the market.

Cross border M&A increased in the third quarter, as well as on both a year over year and sequential basis. That said, it still remains well below 2012 levels for the first nine months of the year. Cross border M&A totaled $230.6 in the quarter, up 40% sequentially and 6.6% year over year. For the first nine months, volumes were down 20% to $529.1 billion. Geographically, the Americas and Africa/Middle East were the only major geographic markets that experienced increases in deal volumes, while transaction levels in Europe, Asia- Pacific, and Japan were all down. The United States remained a bright spot globally, with significantly higher deal volumes versus 2012 levels.

On a sector specific basis, telecommunications overtook energy and power as the most active industry for deals. Several large transactions in the telecom space accounted for this. Energy and power accounted for 13% of activity and real estate related deals represented 12% as these two sectors remained strong. Materials was the weakest sector relative to 2012, with 45% lower M&A volume.

As the global economy slowly improves, the M&A market appears to be gaining traction. During the quarter, decision makers grappled with mixed signals from the Federal Reserve related to interest rates. It has become clear that rates will move higher in the future, although the exact timing remains unclear. For the time being, low interest rates and high cash levels on corporate balance sheets should promote M&A and the Fund should continue to benefit.

Closed Deals

D.E Master Blenders 1753 NV (XAMS:DE) is a Netherlands incorporated global producer of coffee and tea products. The company became public in June of 2012 as a spinoff (together with Hillshire Brands (0.1% of net assets as of September 30, 2013)) from former consumer packaged goods company Sara Lee Corp. On March 28, 2013, Joh. A. Benckiser, a European private company with several holdings in the consumer packaged goods universe, made a €12.50 cash offer for the shares of D.E Master Blenders. The tender was extended in order to reach 95% acceptance, and Benckiser is currently performing a statutory buyout of the untendered shares. Our shares were accepted, and we received payment on September 18 for an annualized return of 10.73%.

ExactTarget Inc. (ET) is a provider of cross channel interactive marketing solutions based in Indianapolis, IN. The company went public in November of 2012 at $19 and on June 4, 2013 received a $33.75 cash tender offer from Salesforce.com, a global leader in cloud computing based CRM software. The two companies had partnership agreements in the past, and this combination represents Saleforce.com's largest acquisition to date. The $2.5 billion offer, which came at a premium of over 50% to the previous close of ExactTarget shares, closed on July 12, 2013 for an annualized return of 1.74%. 

Gardner Denver Inc. (GDI), a manufacturer of industrial machinery and parts based in Wayne, PA, announced it would be acquired by Kohlberg Kravis Roberts & Co. L.P. (0.1%) ("KKR") on March 8, 2013. KKR is a private equity firm with $75.5 billion under management. The merger consideration was $76.00 per share, or $3.9 billion total (in addition, the company paid a $0.05 quarterly dividend). The deal closed on July 30, 2013 after receiving shareholder and regulatory approvals for an annualized return of 5.18%.

Lufkin Industries Inc. (NAS:LUFK) provides artificial lift products and services to enhance the flow of oil and gas from wells. On April 8, 2013, General Electric announced it would acquire Lufkin Industries for $88.50 cash per share (in addition, the company paid a $0.125 quarterly dividend). General Electric has been continuing to strengthen its oil and gas business, and the $3.3 billion merger gave General Electric access to Lufkin's artificial lift products and services. The deal was approved by shareholders in late June and it received the necessary regulatory approvals. The deal closed on July 1, 2013 for an annualized return of 1.98%.

Deals in the Pipeline

NV Energy Inc. (1.8% of net assets as of September 30, 2013) (NVE - $23.61 - NYSE)(NVE) is a Las Vegas based holding company, which serves the state of Nevada as both a gas and electric utility. On May 29, 2013, MidAmerican Energy Holdings Company, a subsidiary of Berkshire Hathaway Inc., announced it was acquiring NV Energy for $23.75 per share in a $10 billion merger. MidAmerican, based in Des Moines, IA, provides electricity and natural gas services in several states and currently has no exposure in Nevada. The deal is awaiting approval from the Public Utility Commission of Nevada as well as the Federal Energy Regulatory Commission. The shareholders have already approved the deal, and it is expected to close in January 2014.

Onyx Pharmaceuticals Inc. (4.2%) (ONXX - $124.67 - NASDAQ) (ONXX) is a San Francisco based biotechnology company engaged in the development of cancer related drugs. On August 25, 2013, Amgen Inc. announced a $125.00 cash tender offer for the shares of Onyx. The offer came at the end of negotiations, which began in early June and were confirmed by the company on June 30. The tender, which commenced on September 3, is expected to close on October 1 of this year.

Sourcefire Inc. (3.0%) (FIRE - $75.92 - NASDAQ) (FIRE), based in Columbia, MD, provides cybersecurity technologies – both hardware and software – to enterprises and government agencies worldwide. On July 23, 2013, Cisco announced it would acquire Sourcefire for $76.00 cash per share. The $2.7 billion merger currently has all required regulatory approvals. The shareholder vote is scheduled on October 7, and the deal should close shortly thereafter.

Volterra Semiconductor Corp. (1.2%) (VLTR - $23.00 - NASDAQ)(VLTR) is a California based designer of power management semiconductors for the computing, storage and networking sector. On August 15, 2013, the company received a $23.00 cash tender offer from nearby competitor Maxim Integrated Products Inc., a producer of integrated circuits for various industrial applications with greater scale and presence in the industry. The tender, which commenced on August 30, is expected to close on October 1 of this year. October 4, 2013

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.


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