To Our Shareholders,
For the quarter ended March 31, 2014, the net asset value ("NAV") per Class AAA Share of The Gabelli ABC Fund increased 0.3% compared with the decrease of less than 0.005% 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 0.01%. See page 2 for additional performance information.
Deal Environment and Outlook
In the first quarter of 2014, global deal volumes rose 52% to $756.1 billion compared with 20131 . While this figure was driven largely by a few multi-billion dollar deals, volumes were still up 36% despite these mergers. It is noteworthy that there were 8,200 deals in the quarter, the lowest first quarter levels since 2004. There was continued strength in private equity mergers and acquisitions (M&A), with $139.1 billion of deals, up 21% versus 2013. This once again attests to the robust financing markets.
Geographically, cross border M&A recovered from a large decrease in 2013. Volumes totaled $245.2 billion, up 86% year-over-year, which is the largest first quarter figure since 2008. The Americas remained robust, with a 53% increase in deal volume. Europe also appears to have begun a turnaround in the quarter, with deal volumes growing 58% to $192.2 billion. Europe had been a major drag on 2013 M&A levels.
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On a sector specific basis, media and entertainment eclipsed energy and power as the most active industry, with $159.3 billion, or 21%, of worldwide volume. It is worth noting that the Time Warner Cable merger accounted for $70.7 billion of this volume. Real estate and energy and power rounded out the top three most active industries. In addition, many of the top deals in these sectors involved mixed consideration, including both cash and stock. This is evidence of the increasing use of stock as a currency.
The strong first quarter of 2014 reflects an improving global economy. Even Europe, which had low deal volumes in 2013, showed significant progress towards a recovery in M&A. Businesses are benefiting as the job market improves, and they appear more ready to deploy capital than in recent quarters. Record high cash balances and historically low interest rates make it attractive to borrow in order to finance transactions. The Fund should continue to benefit from the trend towards more M&A.
Algeta ASA (OSL:ALGETA) is a Norwegian biotechnology company engaged in the development of cancer treatments. In November 2013, the company issued a press release confirming speculation that it was the subject of a takeover attempt by joint venture partner Bayer AG, noting that it received a 336 NOK offer from the German healthcare giant. On December 19, 2013, the two companies agreed to a fully financed 362 NOK cash tender offer. The offer, which valued the company at 17.6 billion NOK, successfully closed on February 26, 2014. The Fund earned a 19.05% return.
Harris Teeter Supermarkets, Inc. (HTSI) is a North Carolina based retailer, which operates grocery stores and pharmacies in the southeastern and mid-Atlantic U.S. On July 9, 2013, The Kroger Co., another large retailer, announced that it was acquiring Harris Teeter for $49.38 cash per share in a $2.5 billion merger. The merger was approved in September of 2013, and the FTC approved the transaction on January 17, 2014. The merger was completed on January 28, 2014. The Fund earned a 2.66% return on this position.
Life Technologies Corp. (NASDAQ:LIFE) is a California based biotechnology company focused on reagents and scientific instruments. On April 15, 2013, Thermo Fisher Scientific announced it would acquire Life for $76 cash per share in a $13.6 billion merger. Shareholders approved the deal in August of 2013 and the merger was completed on February 3, 2014, after regulators in the U.S., European Union, and China approved it. As part of the merger agreement, the Fund received an incremental $0.13 per share in the form of a ticking fee, since the deal did not close by January 14, 2014. The Fund's return was 5.92%.
Santarus Inc. (SNTS) is a biopharmaceutical company based in California, engaged in the development and commercialization of drugs to treat ulcerative colitis. On November 7, 2013, the company received a $32.00 cash tender offer ($2.6 billion) from Salix Pharmaceuticals – a specialty pharmaceutical company focused on drug therapy and devices for the treatment of gastrointestinal disorders, based in Raleigh, NC. The deal closed on January 2, 2014, and the Fund earned a 1.87% return.
Valassis Communications Inc. (VCI) is a Michigan based media and advertising company specializing in direct marketing services. On December 18, 2013, the company received a $34.04 cash tender offer from Harland Clarke Holdings Corp., a private marketing and integrated payment solutions provider located in San Antonio, Texas. The deal closed in early February after receiving the necessary minimum condition and regulatory approvals. The Fund earned a 4.18% return.
ViroPharma Inc. (VPHM), based in Exton, Pennsylvania, is a biotechnology company focused on orphan drugs. Specifically, ViroPharma makes Cinryze, which treats hereditary angioedema. On November 11, 2013, Shire plc of Ireland, which makes a similar drug, announced that it was acquiring ViroPharma for $50 cash per share in a $4.2 billion tender. The tender was extended as the deal required UK approval, and the deal closed in late January. The Fund earned a 5.07% return.
Deals in the Pipeline
ArthroCare Corp. (ARTC) (0.3% of net assets as of March 31, 2014) (ARTC - $48.19 - NASDAQ) is a Texas based developer of medical devices for surgical applications in the orthopedic and ENT fields. On February 3, 2014, the company entered into a $48.25 cash per share merger with UK-based competitor Smith & Nephew plc, valuing the company at $1.5 billion. In addition to the merger consideration, shareholders will likely receive a pro-rata share of the proceeds from a Class Action settlement with Smith & Nephew totaling up to $12 million. The deal has been cleared by antitrust authorities in the U.S. and Germany and is currently being reviewed in the UK. ArthroCare shareholders will vote on the transaction in May and closing is expected by mid-2014.
Beam Inc. (BEAM) (4.9%) (BEAM - $83.30 - NYSE) is a leading premium spirits company, with brands such as Jim Beam and Maker's Mark bourbons. On January 13, 2014, Suntory Holdings Limited, a Japanese holding company that sells both alcoholic and non-alcoholic beverages, announced it would acquire Beam for $83.50 cash per share in a $16 billion merger. Shareholders have approved the deal, and the companies are awaiting approval in Europe. The deal is expected to close in late April.
Coastal Contacts Inc. (0.2%) (COA - $11.21 - NASDAQ) is a Vancouver based direct-to-consumer optical products manufacturer and retailer, with over 5 million customers worldwide. On February 27, 2014, the company received a CAD 12.45 cash merger offer from Essilor International. Essilor is a French ophthalmic optics company and a world leader in the corrective lense space. The deal is currently pending approval by Canadian authorities and shareholders, and we expect the deal to close by mid-May.
LIN Media LLC (LIN) (0.1%) (LIN - $26.50 - NYSE) 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., another broadcasting company, announced that it would acquire LIN in a $1.6 billion merger. Each shareholder of LIN can elect to receive $27.82 in cash or 1.5762 shares of a new holding company, subject to proration. The deal has a "window-shop" period through April 25, 2014 and is expected to close in early 2015 after both companies receive shareholder and U.S. regulatory approvals.
Safeway Inc. (SWY)(1.0%) (SWY - $36.94 - NYSE), based in California, is the third largest food and drug retailer in North America, with over 1,300 stores. On March 6, 2014, the company entered into a $9 billion merger with Albertsons grocery chain, which is controlled by Cerberus Capital Management, L.P. The offer consists of $32.50 in cash, the distribution of 37.8 million shares of Blackhawk Network Holdings, and a contingent value right (tied to real estate and Safeway's interest in a Mexican food retailer) estimated at $3.65 per share. The offer included a "go-shop" period, which expired on March 27, 2014. The merger is expected to close by the end of 2014, pending regulatory approval and the shareholder vote.
Scania AB (SCV.A)(0.8%) (SCV/A - SEK 190.40 - STO), based in Sweden, is a leader in the manufacture of heavy duty trucks and buses. Since 2008, the company has been controlled by global automaker Volkswagen AG, through its ownership of 62.64% of the company and an 89.18% share of the vote. On February 21, 2014, Volkswagen launched a SEK 200 tender for shares of both classes it does not currently own. The tender, which is conditioned upon Volkswagen reaching a 90% ownership level, is expected to expire in late April.
UNS Energy Corp. (UNS)(1.4%) (UNS - $60.03 - NYSE) is a gas and electric utility based in Tucson, Arizona. On December 11, 2013, the company announced that it was being acquired by Fortis, the distribution utility based in Newfoundland, Canada. Fortis, which is continuing to consolidate American utilities, is paying $60.25 cash per share in this $4.3 billion merger. In addition, UNS shareholders will receive dividends through the close of the deal, including pro-rated dividends. The deal is expected to be completed by the end of 2014, pending shareholder and regulatory approvals.
Zale Corporation (2.2%) (ZLC)(ZLC - $20.91 - NYSE) is a specialty jeweler based in Texas, with locations throughout North America. On February 19, 2014, Signet Jewelers Limited, a competitor with locations in the U.S. and UK, announced it would acquire Zale for $21 cash per share in a $1.4 billion merger to diversify and expand the business. The merger is expected to close by the end of 2014, after receiving the approval of Zale shareholders as well as regulators.
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.