To Our Shareholders,
For the quarter ended September 30, 2014, the net asset value (“NAV”) per Class AAA Share of The Gabelli ABC Fund decreased 0.6% compared with a decrease of 1.5% 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 third quarter of 2014, global deal volumes rose 26.3% to $888 billion compared with the same period last year.1 Year to date, deal volumes totaled $2.7 trillion. Announced deals greater than $5 billion remained prevalent, with twenty-nine deals in excess of $5 billion announced in each of the past two quarters.2 Only at the peak of the market in the fourth quarter of 2006 and second quarter of 2007 were there this many sizable deals. As in the first half of the year, hostile deals continue to contribute to the increase in worldwide mergers and acquisitions (“M&A”) volume and, for the second straight quarter, they accounted for 8% of merger activity.3 Hostile and unsolicited bids are now at their highest level since 2001.
Geographically, cross border M&A increased to $1.1 trillion through the first three quarters of 2014, up from $488 billion over the same span last year. Cross border M&A accounted for 40% of global volume year to date. European M&A continues to be strong and volumes there reached $693.7 billion during the first nine months of 2014, 81% greater than the same period in 2013. The Americas remained robust with a 58.4% increase in deal volume over the first three quarters of 2013. In addition, Asia Pacific deal volumes increased to $492.9 billion, the strongest period for deal making on record for the region.
On a sector specific basis, energy and power was the most active industry, accounting for 14.8% of global M&A activity. Healthcare was the second at 14%, followed by media and entertainment with 10.1%.
To Our Shareholders,
For the quarter ended September 30, 2014, the net asset value (“NAV”) per Class AAA Share of The Gabelli ABC Fund decreased 0.6% compared with a decrease of 1.5% 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 third quarter of 2014, global deal volumes rose 26.3% to $888 billion compared with the same period last year.1 Year to date, deal volumes totaled $2.7 trillion. Announced deals greater than $5 billion remained prevalent, with twenty-nine deals in excess of $5 billion announced in each of the past two quarters.2 Only at the peak of the market in the fourth quarter of 2006 and second quarter of 2007 were there this many sizable deals. As in the first half of the year, hostile deals continue to contribute to the increase in worldwide mergers and acquisitions (“M&A”) volume and, for the second straight quarter, they accounted for 8% of merger activity.3 Hostile and unsolicited bids are now at their highest level since 2001.
Geographically, cross border M&A increased to $1.1 trillion through the first three quarters of 2014, up from $488 billion over the same span last year. Cross border M&A accounted for 40% of global volume year to date. European M&A continues to be strong and volumes there reached $693.7 billion during the first nine months of 2014, 81% greater than the same period in 2013. The Americas remained robust with a 58.4% increase in deal volume over the first three quarters of 2013. In addition, Asia Pacific deal volumes increased to $492.9 billion, the strongest period for deal making on record for the region.
On a sector specific basis, energy and power was the most active industry, accounting for 14.8% of global M&A activity. Healthcare was the second at 14%, followed by media and entertainment with 10.1%.
Deal volumes thus far in 2014 have already exceeded full year 2013 figures. M&A remains quite strong, as the ingredients for deal making (i.e. low interest rates, high corporate cash on balance sheets, improved corporate confidence) continue to be present in the market. As the Federal Reserve considers raising interest rates, it is once again important to reiterate that, historically, the spreads of deals are positively correlated with the risk free rate. The Fund should continue to benefit from the high levels of M&A in the markets.
Closed Deals
Caracal Energy Inc. is an exploration and production company with operations in the Republic of Chad, Africa. On April 14, 2014, the global natural resources firm Glencore Xstrata plc announced that it would acquire Caracal for £5.50 cash per share. The two firms already had agreements in place in which Glencore had a working interest in Caracal’s assets. The £1 billion merger was completed on July 8, 2014 after receiving shareholder and regulatory approvals. The Fund earned a 21% return.
Hillshire Brands Co., formerly known as Sara Lee Corp., completed the spin-off of D.E Master Blenders 1753 and paid a $3 cash dividend to shareholders on June 28, 2012. As a result, shareholders received one share of the North American meat company, renamed Hillshire Brands (HSH), which subsequently underwent a reverse split of 1 for 5. Hillshire Brands is a concentrated meat and bakery business in the U.S. generating an estimated $4 billion of revenue. It is the leading player in categories such as protein breakfast, breakfast sausages, and hot dogs under the Jimmy Dean, Hillshire Farm, and Ball Park brands. On July 2, 2014, following a bidding war between Tyson Foods (TSN) and Pilgrim’s Pride (PPC) and the termination of the Hillshire agreement to acquire Pinnacle Foods (PF) (less than 0.1% of net assets as of September 30, 2014), which was previously announced on May 12, 2014, Hillshire announced that it had received a $63 cash tender offer from Tyson Foods. The deal valued Hillshire Brands at $8.6 billion. The deal closed on August 28, 2014 after receiving the necessary regulatory approvals and the successful completion of the tender offer. The Fund earned a 30.9% return.
Hittite Microwave Corp. is a manufacturer of radio frequency and microwave technology located in Chelmsford, Massachusetts. On June 9, 2014, Analog Devices, Inc., a neighboring manufacturer of signal processing technology based in Norwood, Massachusetts, offered $78 cash to acquire the company. The deal was completed on July 22, 2014 after the tender offer concluded successfully and regulatory approvals were received in the U.S. and Germany. The Fund earned a 2.5% return.
InterMune Inc. is a California based biotechnology company focused on the research, development, and commercialization of innovative therapies in pulmonology and orphan fibrotic diseases. On August 24, 2014, InterMune received a $74 cash per share tender offer from Swiss pharmaceuticals company Roche Holding AG, valuing the company at $8.3 billion. The offer was conditioned on tender acceptance of a majority of InterMune’s outstanding shares. The offer successfully concluded on September 29, 2014. The Fund earned a 13.2% return.
OpenTable Inc. is a San Francisco based provider of online restaurant reservations for approximately 32,000 restaurants. On June 13, 2014, the company received a $103 cash tender offer from online travel company The Priceline Group Inc. valuing OpenTable at $2.6 billion. The offer was conditioned upon the tender acceptance of a majority of OpenTable’s outstanding shares. The offer successfully concluded on July 24, 2014. The Fund earned a 6.6% return.
Susser Holdings Corp. is an operator of convenience stores and one of the largest motor fuel distributors in Texas. Susser operates 640 convenience stores in Texas, New Mexico, and Oklahoma. On April 28, 2014, Susser entered into a merger agreement with Energy Transfer Partners (ETP), a Master Limited Partnership with a diversified portfolio of energy assets, valuing Susser at $1.8 billion. Susser shareholders could elect to receive either $80.25 in cash or 1.4506 ETP common units, or a combination of both (subject to proration). The transaction was successfully completed on August 29, 2014 after obtaining antitrust approval as well as a positive vote by Susser shareholders. The Fund earned a 15% return.
UNS Energy Corp. 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, paid $60.25 cash per share in this $4.3 billion merger. In addition, UNS shareholders received dividends through the close of the deal, including pro-rated dividends. The deal closed on August 15, 2014 after receiving shareholder and regulatory approvals. The Fund earned a 5.5% return.
Deals in the Pipeline
Bally Technologies Inc. (1.4% of net assets as of September 30, 2014) (BYI, Financial)($80.70 - NYSE) 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 requires a positive vote by the majority of Bally’s shareholders as well as approval from several gaming commissions in the U.S. The transaction already received U.S. antitrust clearance and is expected to close by year end.
Einstein Noah Restaurant Group Inc. (0.3%) (BAGL, Financial)($20.16 - NASDAQ) is a Colorado based owner/operator, franchisor, and licensor of bagel specialty restaurants in the U.S. On September 29, 2014, Einstein Noah announced a definitive agreement to be acquired by private investment firm JAB Holding Co. through a $20.25 per share cash tender offer. The offer is conditioned on a minimum tender of at least a majority of Einstein Noah’s outstanding shares. Greenlight Capital, which owns 37% of Einstein Noah, has agreed to tender its shares in support of the transaction. The deal is expected to close by year end.
International Game Technology (1.5%) (IGT, Financial)($16.87 - NYSE), 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-three jurisdictions, four of which have already approved the deal. The transaction has received U.S. antitrust clearance and is expected to close by the first half of 2015.
Jazztel plc (1.1%) (JAZ, Financial)($16.19 - Madrid Stock Exchange) 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.
Kodiak Oil & Gas Corp. (0.8%) (KOG, Financial)($13.57 - NYSE) is an exploration and production company with reserves and operations concentrated in the Williston Basin of North Dakota. On July 13, 2014, the company entered into an all-stock merger agreement with competitor Whiting Petroleum Corp, valuing the company at $6 billion. The consideration is 0.177 shares of Whiting stock for each share of Kodiak Oil & Gas. The transaction is expected to close in the fourth quarter of 2014 after receiving shareholder approvals.
LIN Media LLC (0.3%) (LIN, Financial)($22.20 - 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 $2.6 billion merger. Each shareholder of LIN can 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 is expected to close by late 2014 after both companies receive shareholder and U.S. regulatory approvals.
Measurement Specialties, Inc. (0.7%) (MEAS, Financial)($85.61 - NASDAQ) is a designer and manufacturer of sensors and sensor-based systems located in Hampton, Virginia. The company received an $86 cash merger offer from data connectivity and power flow leader TE Connectivity Ltd. (formerly Tyco Electronics) on June 18, 2014, valuing the company at about $1.7 billion. On August 26, 2014, Measurement Specialties shareholders approved the deal. The deal is expected to close by the end of this year after approval of the transaction by several regulatory authorities.
Nobel Biocare Holding AG (2.5%) (NOBN SW - $17.75 - SIX Swiss Exchange), 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 will receive 17.10 Swiss Francs for each of their shares in a tender offer, which is expected to close on November 14. The transaction is expected to close by the end of 2014 pending regulatory approval in the U.S. and Switzerland.
TRW Automotive Holdings Corp. (2.7%) (TRW, Financial)($101.30 - NYSE) 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 by the first half of 2015.
October 8, 2014
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, Financial)
• 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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