To Our Shareholders,
For the quarter ended September 30, 2015, the net asset value (“NAV”) per Class AAA Share of The Gabelli ABC Fund decreased 0.5% compared with a decrease of 2.4% 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 0.0%. See page 2 for additional performance information.
Commentary
In the third quarter of 2015, global deal volume totaled $1.1 trillion, a 24% increase over the third quarter of 2014 1. Total deal volume for the first nine months of the year stands at $3.2 billion. This represents an increase of 32% over the same period last year, marking the strongest first nine months for mergers and acquisitions (M&A) since 2007. This continued strength was driven by a 96% increase in announced deals greater than $10 billion, which accounted for 36% of total volume for the three quarters. Additionally, the number of worldwide deals announced increased by 2% in the first nine months of the year.
Geographically, cross border M&A increased 18% over the same period last year to $1.1 trillion, accounting for 35% of total deal volume. Domestic activity increased 46% versus the first nine months of 2014, and totaled $1.5 trillion across 7,520 deals. European M&A increased by 8.8% over 2014 to $1.03 trillion during the first three quarters of 2015. In addition, Asia Pacific (ex-Japan) deal volumes totaled $830 billion for the same period, a 61% increase over the first nine months of 2014, despite the widely broadcast concerns in China. Japanese M&A also increased, up 29% to $126.6 billion over the same period last year. This is all due to the recovery of the global economy and companies seeking inorganic growth overseas.
On a sector specific basis, the Energy and Power sector remains the most active, particularly given the decrease in oil prices. For the first nine months of the year, Energy and Power accounted for 14.8% of announced M&A activity, with the Healthcare and Technology sectors rounding out the top three, accounting for 14.3% and 9.9% of announced M&A value, respectively.
With worldwide deal volumes continuing to grow steadily, it is clear that M&A remains an important growth strategy to corporations across the world. Stock prices remain high, cash is abundant on corporate balance sheets, and interest rates remain low. All of these elements should result in continued strength for M&A. Furthermore, when the Fed does in fact raise interest rates, deal spreads should widen as they have done historically. The deal spread is comprised of two main factors – the risk free rate and the risks inherent to the deal. As such, rising rates tend to cause an increase in spreads. The Fund should benefit from these factors and the continued surge in M&A.
Positions Closed in the Third Quarter of 2015
Catamaran Corporation (CTRX, Financial) 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. This was a combination of the #3 and #4 pharmacy benefit managers in the U.S. Under the terms of the combination, OptumRx acquired Catamaran for $61.50 in cash per share. The combination required regulatory and shareholder approvals and closed on July 23, 2015. The Fund earned an annualized return of 8.71%.
Hospira Inc. (HSP, Financial), based in Lake Forest, Illinois, is the world’s leading provider of injectable drugs and infusion technologies and a global leader in biosimilars. 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 closed on September 3, 2015, following shareholder and regulatory approvals, and the deal created a leading global injectables business. The Fund earned an annualized return of 5.82%.
Omnicare, Inc. (OCR, Financial) is a Cincinnati, Ohio based pharmaceutical services provider. On May 21, 2015, CVS Health announced that it would acquire Omnicare for $98 cash per share in a $9.5 billion merger. The Omnicare acquisition expands CVS into the long term care pharmacy dispensing channel. The deal received regulatory and shareholder approvals and was completed on August 18, 2015.The Fund earned an 8.46% annualized return.
Pall Corp. (PLL, Financial), based in Port Washington, New York, manufactures and markets filtration, separation, and purification products. On May 13, 2015, the company announced that it would be acquired by Danaher Corporation for $127.20 per share in cash or $13.8 billion. Danaher would expand its healthcare related business, with significant recurring revenue as part of the deal. The transaction required shareholder and regulatory approvals, and closed on August 31, 2015. The Fund earned an annualized return of 8.16%.
Polypore International Inc. (PPO, Financial), based in Charlotte, North Carolina, develops and manufactures microporous membranes used in products such as smartphones, laptops, tablets, and lawn and garden equipment. On February 23, 2015, it announced that the company would be sold to a U.S. subsidiary of Asahi Kasei Corp. for $60.50 in cash. Additionally, immediately prior to the completion of Asahi Kasei’s acquisition, 3M would purchase the assets of Polypore’s Separations Media Segment for $1 billion, with Asahi Kasei receiving the proceeds from the sale. After receiving regulatory and shareholder approvals, the merger closed on August 26, 2015. The Fund earned a 4.57% annualized return.
Rally Software Development Corp. (RALY, Financial), located in Boulder, Colorado, is a global provider of cloud based and enterprise class software and services solutions. On May 27, 2015, CA Technologies announced it would acquire Rally for $19.50 per share, or approximately $480 million, net of cash. After meeting the minimum condition and receiving regulatory approvals, the tender was completed on July 8, 2015. The Fund earned an annualized return of 2.43%.
Deals in the Pipeline at the end of the Third Quarter of 2015
AGL Resources Inc. (GAS, Financial) (less than 0.1% of net assets as of September 30, 2015) (GAS – $61.04 – NYSE), based in Atlanta, Georgia, is an energy services holding company with operations in natural gas distribution, retail operations, wholesale services, and midstream operations. On August 24, 2015, The Southern Company announced that it would acquire AGL for $66 in cash per share, or $12 billion. The transaction would create the second largest utility
company by customer base in the U.S. Subject to regulatory and shareholder approvals, the deal is expected to close in the second half of 2016.
Cablevision Systems Corp. (CVC, Financial)(0.6%) (CVC – $32.47 – NYSE), based in Bethpage, New York, owns and operates cable systems in the U.S., and is the leading operator in the New York metropolitan area, which represents the most attractive U.S. cable market measured by affluence and population density. On September 17, 2015, Altice N.V. agreed to acquire Cablevision for $9.7 billion or $34.90 per share in cash. The transaction reiterates Altice’s desire to continue to expand its presence in the U.S. market. Subject to shareholder and regulatory approvals, the deal is expected to close in the first half of 2016.
Cameron International Corp. (CAM, Financial)(less than 0.1%) (CAM – $61.32 – NYSE) is a Houston, Texas based provider of flow equipment products, systems, and services to worldwide oil and gas industries. On August 26, 2015, it was announced that Schlumberger would be acquiring Cameron for $14.8 billion. Under the terms of the transaction Cameron shareholders will receive 0.716 shares of Schlumberger and $14.44 of cash per share. Following shareholder and regulatory approvals, the transaction is expected to close in the first quarter of 2016.
Cleco Corp. (1.8%) (CNL, Financial)(CNL – $53.24 – NYSE), headquartered in Pineville, Louisiana, is a utility holding company. On October 20, 2014, the company agreed to be acquired by an investor group led by Macquarie Infrastructure and Real Assets and British Columbia Investment Management Corporation. Cleco shareholders will receive $55.37 per share in cash. The transaction is subject to regulatory and shareholder approvals and is expected to close in the second half of 2015.
Dealertrack Technologies Inc. (TRAK, Financial)(3.8%) (TRAK – $63.16 – NASDAQ), based in Lake Success, New York, provides digital solutions for all major segments of the automotive industry. On June 15, 2015, Cox Automotive announced it would be purchasing Dealertrack for $63.25 per share in a $4 billion deal. The transaction closed on October 1, 2015, after receiving shareholder and regulatory approvals.
HCC Insurance Holdings Inc. (HCC, Financial)(3.2%) (HCC – $77.47 – NYSE) based in Houston Texas, is an international specialty insurer. On June 10, 2015, Tokio Marine Holdings announced that it would acquire HCC in a transaction worth $7.5 billion, or $78 cash per HCC share. Expected to close in the fourth quarter, the transaction has received shareholder approval and is now waiting for the results of the regulatory review.
Italcementi SpA (0.2%) (IT – $11.08/€9.89 – Borsa Italiana Milan Stock Exchange) based in Bergamo, Italy, is the fifth largest cement producer in the world. On July 28, 2015, HeidelbergCement AG announced it would acquire a 45% stake in the company through a tender offer worth €3.7 billion, or €10.60 per share. The remaining 55% will be purchased through another tender offer with the same terms at a later time. Following regulatory approval, the transaction is expected to close in 2016.
Kythera Biopharmaceuticals Inc. (KYTH)(3.4%) (KYTH – $74.98 – NASDAQ), based in Westlake Village, California, is a global biopharmaceutical company that focuses on developing and commercializing medical aesthetics products. On June 17, 2015, Allergan announced that it would acquire Kythera in a merger worth $1.9 billion or $75 per share. Initially, the transaction was to be comprised of cash and stock, but on August 5, Allergan amended the terms of the offering to all cash. The transaction closed on October 1, 2015, after receiving regulatory and shareholder approvals.
PartnerRe Ltd. (PRE)(1.5%) (PRE – $138.88 – NYSE), is a global reinsurer based in Bermuda that provides multi line reinsurance to insurance companies. On January 26, 2015, the company announced that it would merge with AXIS Capital Holdings Limited in a transaction worth $5.3 billion. Under the terms of the transaction, PartnerRe shareholders would receive 2.18 shares of AXIS for each PartnerRe share they owned. On August 3, 2015, however, AXIS Capital’s rival, EXOR S.p.A, announced that they would be acquiring PartnerRe for $140.50 cash per share, or $6.9 billion. PartnerRe agreed to sell itself to EXOR, and closed its go-shop period on September 14, 2015. Upon receipt of shareholder and regulatory approvals, the company expects the transaction to close in the first quarter of 2016.
Precision Castparts Corp. (1.5%) (PCP – $229.71 – NYSE), based in Portland, Oregon, manufacturers complex metal components and products for the aerospace, power, and general industrial markets. On August 10, 2015, the company announced that it would be purchased by Berkshire Hathaway for $235 cash per share in a merger worth $32.3 billion. The transaction is expected to close in the first quarter of 2016 after receiving shareholder and regulatory approvals.
Sigma-Aldrich Corp. (SIAL)(4.4%) (SIAL – $138.92 – NASDAQ) is a leading life science and technology company based in St. Louis, Missouri that manufactures and distributes more than 230,000 chemicals, biochemical, 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 received shareholder and regulatory approvals and should close within the next two months, pending completion of divestitures in the EU.
StanCorp Financial Group Inc. (SFG)(2.8%) (SFG – $114.20 – NYSE), is a Portland Oregon based financial services company. On July 23, 2015 the company was acquired by Meiji Yasuda Life Insurance Company for $115 cash per share, in a merger worth $4.9 billion. The transaction includes a 25 day go-shop period in which StanCorp could solicit other potential bidders to make an offer. Following the go-shop period and after receiving shareholder and regulatory approvals, the transaction is expected to close in the first quarter of 2016.
TECO Energy Inc. (TE)(less than 0.1%) (TE – $26.26 – NYSE), based out of Tampa, Florida, is an energy related holding company with regulated electric and gas utilities in Florida and New Mexico. On September 4, 2015, Emera Inc. announced that it would acquire TECO for $27.55 cash per share in a merger worth $6.5 billion. The merger is expected to close in mid-2016 and is subject to shareholder and regulatory approvals.
Thoratec Corp. (THOR)(2.1%) (THOR – $63.26 – NASDAQ), headquartered in Pleasanton, California, designs, manufactures and sells products to treat the full range of clinical needs for patients suffering from advanced heart failure. On July 22, 2015, St. Jude Medical announced that it would acquire the company for $63.50 cash per share in a merger worth $3.4 billion. Following regulatory and shareholder approvals, the transaction is expected to close in the fourth quarter of 2015.
October 7, 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.
Merger Arbitrage Risk. The principal risk associated with the Fund’s investment strategy is that certain of the proposed reorganizations in which the Fund invests may involve a longer time frame than originally contemplated or be renegotiated or terminated, in which case losses may be realized. The Fund invests all or a portion of its assets to seek short-term capital appreciation. This can be expected to increase the portfolio turnover rate and cause increased brokerage commission costs.
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.
www.gabelli.com
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