To Our Shareholders,
For the quarter ended March 31, 2016, the net asset value (“NAV”) per Class AAA Share of The Gabelli ABC Fund increased 0.8% compared with an increase of 3.4% 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 for the quarter was 0.07%. See page 2 for additional performance information.
Global deal activity for the first quarter of 2016 totaled a healthy $699.4 billion, despite representing an 18% decrease from the same period in 20151. It is important to remember that 2015 was a record breaking year for Mergers and Acquisitions (M&A) volumes, and that while the first quarter volume decreased 56% sequentially, last year’s fourth quarter was the busiest quarter for deal making since analysts began tracking deal volume in 1980. We must keep things in context. Within that framework, there has been a decrease in the number of “mega-deals” announced. In the first quarter, there were twenty-two deals that were valued at over $5 billion dollars, and overall there were 9,250 deals announced globally.
Breaking down volumes by sector, Industrials and Materials have led the charge in terms of volume. Specifically, Industrial M&A totaled $116.4 billion during the quarter which represented an increase of 71% over first quarter 2015 data. Similarly, activity in the Materials sector increased 41%. On the opposite end of the spectrum, Healthcare which had record breaking activity in 2015 was down 53% year-over-year, to $52.8 billion dollars.
Geographically speaking, U.S. centered M&A fell by roughly 38% while European deal volume has ticked up to a five year high for the continent. Announced deals in Europe totaled $189.4 billion, its strongest volumes since 2011. Turning to Asia, cross-border Chinese M&A rose 8%. This growth was fueled by Chinese companies looking to expand outside their borders by acquiring non-Chinese firms. Cross border M&A accounted for 33% of total M&A activity in the first quarter of 2016.
In this low interest rate environment, companies are still likely to look for accretive deals to accelerate their growth and market share. While the Federal Reserve has already raised rates slightly, newly developing economic conditions worldwide are causing speculation as to when the next rate increase will be. Continued low rates with a healthy and active debt market will further perpetuate the M&A trend worldwide. As deal activity increases in both volume and scale, the Fund should be well positioned to benefit.
Closed Positions
BioMed Realty Trust, Inc. (BMR, Financial), based in San Diego, California operates as a real estate investment trust (REIT). The company owns, acquires, develops, redevelops, leases and manages laboratory and office space for the life science industry. On October 8, 2015, BMR entered into an agreement to be acquired by Blackstone Real Estate Partners VIII. The deal price was $23.75 cash per share and included a provision for a “ticking fee” of $0.003 per share, per day, for each day the deal remained outstanding beyond January 1, 2016. After regulatory and shareholder approval, the deal closed on January 27, 2016 for a total payout per share of $23.82. The Fund earned a 9.13% annualized return.
Dyax Corp. (DYAX, Financial) is a Burlington, Massachusetts based biopharmaceutical company. The company is targeting hereditary angioedema (HAE), a rare, genetic inflammatory condition, via their pipeline drug DX-2930, an injectable treatment for the treatment of acute HAE. On November 2, 2015, the company received a $5.9 billion cash merger offer by Shire plc, a leading specialty pharmaceutical company with an interest in the HAE space. The offer was structured to include $37.30 cash per share at closing, along with a contingent value right (CVR) (0.1% of net assets as of March 31, 2016) potentially worth $4.00. The CVR is tied to the FDA approving DX-2930 by 2019. The deal was approved by U.S. antitrust regulators, and it closed on January 22, 2016. No return data is available for the deal at this time because of the CVR structure and unknown future payout amounts.
Ezchip Semiconductor Ltd. (EZCH, Financial), based in Yokneam, Israel is a fabless semiconductor company that provides data-path processing solutions for a range of applications for carrier, cloud and data center networks. On September 30, 2015, the company entered into a merger agreement with Mellanox Technologies to be acquired of $25.50 cash per share, in a transaction worth $765 million. Regulatory and shareholder votes were received by February of 2016, and the deal officially closed on February 22, 2016. The Fund earned a 2.36% annualized return.
Geographically speaking, U.S. centered M&A fell by roughly 38% while European deal volume has ticked up to a five year high for the continent. Announced deals in Europe totaled $189.4 billion, its strongest volumes since 2011. Turning to Asia, cross-border Chinese M&A rose 8%. This growth was fueled by Chinese companies looking to expand outside their borders by acquiring non-Chinese firms. Cross border M&A accounted for 33% of total M&A activity in the first quarter of 2016.
In this low interest rate environment, companies are still likely to look for accretive deals to accelerate their growth and market share. While the Federal Reserve has already raised rates slightly, newly developing economic conditions worldwide are causing speculation as to when the next rate increase will be. Continued low rates with a healthy and active debt market will further perpetuate the M&A trend worldwide. As deal activity increases in both volume and scale, the Fund should be well positioned to benefit.
Airgas Inc. (2.3%) (ARG, Financial)(ARG – $141.64 – NYSE) is a Wayne, Pennsylvania based producer and supplier of industrial and specialty gases. The company agreed to a $13 billion ($143 per share) cash merger with European competitor Air Liquide SA on November 17, 2015. The deal is subject to a majority vote by Airgas shareholders. Closing is expected in the second quarter of 2016, pending antitrust approval in the U.S.
ITC Holdings Corp. (less than 0.1%) (ITC, Financial)(ITC – $43.57 – NYSE) is an independent electricity transmission company in the United States. The company operates, maintains and invests in transmission infrastructure. The company’s customers include investor owned utilities, municipalities, cooperatives, power marketers and alternative energy suppliers. It entered into an agreement with Fortis Inc on February 9, 2016 to be acquired in a $6.9 billion deal. Shareholders of ITC will receive $22.57 cash and .752 shares of Fortis per share of ITC. Both companies must approve the merger, and it must receive regulatory approval. The transaction is expected to close in late 2016.
Questar Corporation (1.3%) (STR, Financial)(STR – $24.80 – NYSE) is an integrated natural gas holding company that develops, produces and delivers clean energy in the Rockies, North America. The company, through its subsidiaries is principally engaged in three lines of business: Questar Gas Company, Wexpro Company, and Questar Pipeline Company. Questar entered into an agreement to merge with Dominion Resources on February 1, 2016 in a $4.4 billion transaction. Under the terms of the agreement, shareholders will receive $25 cash per share of STR. The deal is subject to traditional regulatory and shareholder votes with an expected closing in the second half of 2016.
SABMiller Plc (0.1%) (SAB, Financial)(SAB – $61.13/4,251 p – London Stock Exchange) is a holding company, which has brewing and beverage operations across five regions. The company, together with its subsidiaries, is engaged in the manufacture, distribution and sale of beverages, best known for its Miller brand of beer. On November 11, 2015 SAB agreed to be acquired by Anheuser- Busch InBev in a cash and stock deal valued at 72.6 billion GBP. The terms of the deal give shareholders either 44GBP per share of SAB, or a combination of 3.7788GBP and .483969 shares of Anheuser-Busch. The deal is subject to shareholder approvals and regulatory conditions being met. We currently expect the deal to close in the second half of 2016.
USG People NV (1.2%) (USG, Financial)(USG – $19.78/€17.38 – Amsterdam Stock Exchange) is a Netherlands based group of companies that provide services in the field of staffing, human resources and customer care services. The company operates in three segments: General Staffing, Outsourcing and Payroll Staffing, and Specialist Staffing. The company announced on December 22, 2015 that it would be acquired by Recruit Holdings Co., Ltd. for 17.50 EUR per share in a 1.4 billion euro deal. The deal requires satisfaction of a minimum condition in addition to regulatory approval. We currently expect the deal to close in the second quarter of 2016.
The Empire District Electric Company (0.1%) (EDE, Financial)(EDE – $33.05 – NYSE) is a regulated utility company. The company is engaged in the generation, purchase, transmission, distribution and sale of electricity. It provides its services within Missouri, Kansas, Oklahoma and Arkansas. It operates its businesses in three segments: electric, gas and ‘other’. On February 2, 2016, EDE entered into an agreement to be acquired by Algonquin Power & Utilities Corp. for $34 cash per share. This transaction values EDE at $1.5 billion dollars, and is subject to regulatory approval and shareholder votes. It is currently expected to close in the first quarter of 2017.
The Fresh Market, Inc. (0.9%) (TFM, Financial)(TFM – $28.53 – NADSAQ) based in Greensboro, North Carolina – is a specialty grocery retail store. It primarily focuses on the perishable product categories, which include meat, seafood, produce, deli, bakery, flora, sushi and prepared foods. The company's non-perishable product categories consist of traditional grocery, frozen and dairy products, as well as bulk, coffee and candy, beer and wine, and health and beauty. On March 14, 2016, Apollo entered into an agreement to buy TFM for $28.50 cash per share. The deal is subject to regulatory approval and approval of a majority of the minority shareholders in the company. The total consideration for the deal is $1.3 billion.
The Valspar Corporation (2.2%) (VAL, Financial)(VAL – $107.02 – NYSE) is engaged in developing, manufacturing and distributing a range of coatings, paints and related products. The company operates through two business segments: Coatings and Paints. On March 31, 2016 Valspar announced an agreement with competitor Sherwin-Williams to be acquired in a transaction with an estimated value of $8.9 billion. The deal specifies that shareholders of VAL will receive $113 cash per share, and requires a shareholder vote along with regulatory approval. However, should the company need to make divestitures exceeding a specified threshold, then the consideration would be revised down to $105. We expect the deal to close in the early part of 2017.
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 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.
