INVESTMENT SCORECARD
Financial engineering and Mergers & Acquisitions (M&A) added significantly to returns during the quarter. Grupo Televisa (+62%, 2.2% of net assets as of June 30, 2021) announced that it had agreed to sell its Mexican content operations to the U.S.’ leading Spanish language broadcaster Univision for $3 billion cash, with a 45% stake in the new company, supporting Televisa’s efforts to extend broadband in Mexico while better positioning new Univision to deploy its direct-to-consumer service. Macquarie Infrastructure (+20%, 1.6%) will efficiently liquidate after agreeing to sell its remaining private aviation and utilities operations. Although several re-opening winners shed gains in Q2, spirits maker Diageo (+17%, 3.1%) benefited from a return to bars and airport commerce, while American Express (+17%, 5.1%) acted as a surrogate for increased consumer spending, particularly related to travel. On the other hand, the announced combination of Discovery (-21%/-29%, 1.6%/0.4%) and AT&T’s Warner Entertainment, home of HBO Max, the Warner Bros. studio and Turner cable networks, weighed on returns. The deal scales Discovery’s streaming efforts, but was sold on concerns that the stock would be “dead money” until the merger closed in mid-2022. The Walt Disney Company (-5%, 1.4%) declined on the outlook for more competition for its leading Disney+ streaming service and anxiety around the impact of COVID-19 flares on its theme parks. Finally, Sony (-8%, 6.6%), provided a disappointing earnings forecast including a drag that chip shortages are likely to have on sales of its popular new PS5 gaming platform.
LET'S TALK STOCKS
The following are stock specifics on selected holdings of our Fund. Favorable earnings prospects do not necessarily translate into higher stock prices, but they do express a positive trend that we believe will develop over time. Individual securities mentioned are not necessarily representative of the entire portfolio. For the following holdings, the percentage of net assets and their share prices stated in U.S. dollar equivalent terms are presented as of June 30, 2021.
American Express Co. (AXP, Financial) (5.1% of net assets as of June 30, 2021) (AXP – $165.23 – NYSE) is the largest closed loop credit card company in the world. The company operates its eponymous premiere branded payment network and lends to its largely affluent customer base. As of December 2020, American Express has 114 million cards in force and nearly $90 billion in loans, while its customers charged over $1.0 trillion of spending on their cards in 2020. The company’s strong consumer brand has allowed American Express to enter the deposit gathering market as an alternate source of funding, while the company’s affluent customers have picked up spending. Longer term, American Express should capitalize on its higher spending customer base and continue to expand into other payment related businesses, such as corporate purchasing, while also growing in emerging markets. Similarly, the company is looking at the growing success of social media as an opportunity to expand its product base and payment options.
Grupo Televisa (TV, Financial) (2.2%) (TV – $14.28 – NYSE) is Mexico’s largest media company with operations in television broadcasting, cablenetworks, television production, satellite distribution (through its 58.7% ownership of Sky Mexico) and cable distribution. Televisa also has a 36% interest in Univision Communications, the fifth largest overall and most popular Spanish language broadcast network in the US. In April 2021, TV announced it would combine its content operations with Univision, in the process increasing its ownership in Univision to 45% and reducing leverage to less than 2x EBITDA. With a dominant position in Spanish language content, new Univision will be poised to launch a streaming service addressing 600 million Spanish speakers around the world. Meanwhile, Televisa is increasing their investment in Mexican broadband where penetration of 60% lags the US. We expect the continued recovery in post-COVID Mexican advertising spending as well as growth in pay-television and broadband penetration to benefit Televisa over time.
Sony Corp (SONY, Financial) (6.6%) (SONY – $97.22 – NYSE) is a conglomerate based in Tokyo, Japan focusing on direct-to-consumer entertainment products. Sony is the #1 integrated global gaming company with its Sony PlayStation 5 gaming platform. Sony Music Recording commands #2 and Music Publishing #1 global share and is a hidden asset as music values have increased with the success of streaming. Sony also operates the Sony/Columbia film studio, which is well positioned in the OTT streaming wars as a major supplier of high quality library shows like Seinfeld. Sony is an image sensor leader with over 50% global revenue share. We expect a strong 5G iPhone upgrade cycle will benefit Sony as a sole supplier of iPhone’s image sensors. Sony is also aiming at championing its image sensor products for Advanced Driver Assistance Systems in automotive applications. Sony’s Electronics business remains a globally diversified and defensive cash generator.
Swedish Match AB (OSTO:SWMA, Financial) (6.5%) (SWMA – $8.53/SEK72.98 – Stockholm Stock Exchange) produces tobacco products that include snus and snuff, chewing tobacco, cigars, and lights. The company has been benefiting from the growth of the smokeless tobacco market in both Scandinavia and the U.S., as public smoking bans and health concerns are driving consumers to seek alternative tobacco products to cigarettes. The company has a rapidly growing tobacco-free nicotine pouch product called ZYN that is growing rapidly in the U.S. and Scandinavia, and is driving growth in its mass market cigar business through its new natural leaf products. Driven by ZYN, we expect Swedish Match to continue to grow its smokeless business globally, and the company could be an attractive takeover candidate for a global tobacco company that wants to increase its presence in the smokeless segment.
ViacomCBS (VIAC, Financial) (7.5%) (VIACA – $48.45 – NASDAQ) is the product of the December 2019 recombination of Viacom and CBS, two companies controlled by the family of the late Sumner Redstone. ViacomCBS is a globally-scaled content company with networks including CBS, Showtime, Nickelodeon, MTV, Comedy Central, VH1, BET, thirty television stations and the Paramount movie studio. The companies separated in 2005, but changes in the media landscape have put a premium on global scale. Together ViacomCBS should be able to better navigate shifts in consumer behavior and monetization while generating significant cost savings and enhancing revenue growth with the newly launched Paramount+ direct-to-consumer platform as a centerpiece.
Returns represent past performance and do not guarantee future results. Investment returns and the principal value of an investment will fluctuate. When shares are redeemed, they may be worth more or less than their original cost. Current performance may be lower or higher than the performance data presented. Visit www.gabelli.com for performance information as of the most recent month end.
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