To Our Shareholders,
For the quarter ended December 31, 2016, the net asset value (“NAV”) per Class AAA Share of The Gabelli ABC Fund increased 0.8% compared with an increase of 0.7% 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 0.1%. See page 2 for additional performance information.
In the fourth quarter of 2016, global deal volume totaled $1.2 trillion, a 50% increase over the third quarter1. Total deal volume for the entire year was $3.7 trillion, representing a decrease of 16% over the same period last year. Still, 2016 was one of the busiest years on record. Deal count was up slightly year-over-year, suggesting that the average deal size this year was smaller than in 2015.
Geographically, cross border mergers and acquisitions (M&A) accounted for 38% of total deal volume1. Domestic activity was 17% less than in 2015, totaling $1.7 trillion across roughly 11,000 deals. European M&A decreased by 13% from 2015, down to $759.5 billion during 2016. In addition, Asia Pacific (excluding Japan) deal volumes totaled $896 billion for the same period which also represented a slowdown. Japan saw a 16% decrease in deal volumes to $83.5 billion. Given that 2015 was the most active year on record, the year-over-year comparisons were difficult to achieve in all regions, despite the number of deals announced in most regions being higher than in 2015. Companies searched outside their borders for acquisition targets, taking advantage of favorable currency shifts and macroeconomic events.
Energy & Power reclaimed the top spot as the most active M&A sector this year, accounting for $608 billion of deal volume. Healthcare fell to the eighth spot as the whole sector fell out of favor in 2016. Technology and Materials rounded out the top three sectors of deal activity, with Technology accounting for 13% of volume and Materials accounting for 11%.
Companies will continue to look at deal making in order to accelerate their growth. Historically low interest rates, high corporate cash levels, and few alternatives for organic growth will continue to push firms towards utilizing M&A. The Federal Reserve has slowly begun to raise interest rates, and it is anticipated that hikes will continue during 2017. That said, rates still remain quite low, despite directionally moving higher. Furthermore, 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 and further Fed action will perpetuate this. The Fund should benefit from these factors and the continued surge in M&A.
Closed Deals:
Cepheid (CPHD, Financial) is a medical diagnostic and testing equipment company based in Sunnyvale, California. On September 6, 2016, Danaher agreed to acquire Cepheid for $53 cash per share, or $4 billion, in order to expand its molecular diagnostics business. The merger received the necessary regulatory and shareholder approvals and closed on November 4, 2016. The Fund earned a 6.58% annualized return.
LinkedInCorp. (LNKD, Financial) is a Mountain View, California-based business. The company operates a professional social network, which currently has over 400 million members. On June 13, 2016, Microsoft made a $196 cash per share offer to acquire the company for a total cost of $26 billion. The deal received the necessary shareholder and regulatory approvals and closed on December 8, 2016. The Fund earned a 6.13% annualized return.
National Interstate Corp. (NATL, Financial), based in Richfield, Ohio, operates as a property and casualty insurance company for the transportation industry. After a failed attempt in 2014, American Financial Group, NATL’s majority owner, entered into an agreement to acquire NATL for $32 cash per share plus a $0.50 special dividend. The deal came after months of negotiations. Subject to customary regulatory and shareholder approvals, the merger closed on November 10, 2016. The Fund earned a 13.22% annualized return.
NetSuite Inc. (N, Financial) is a San Mateo, California-based technology company. NetSuite provides cloud-based software to enterprise clients. The software suite features products for financial management, customer relationship management, e-commerce and retail management, commerce marketing automation, professional services automation and human resources. On July 28, 2016, Oracle entered into an agreement to acquire N for $109 cash per share. This tender valued the company at $8.8 billion, and the transaction was subject to customary regulatory and shareholder approvals. The deal closed on November 7, 2016. The Fund earned a 6.22% annualized return.
RackspaceHostingInc. (RAX, Financial) is a San Antonio, Texas based information technology company. Rackspace specializes in cloud computing technology and storage. On August 26, 2016 Apollo Global with Searchlight Capital made a $32 cash per share offer for the company. The merger valued RAX at $4.3 billion and was subject to traditional regulatory approval and a shareholder vote. The deal closed on November 3, 2016 and the Fund earned a 10.72% annualized return.
CventInc. (CVT, Financial) is a Tysons Corner, Virginia-based software company. Cvent specializes in enterprise event management through its use of cloud-based software. Vista Equity Partners made a $36 per share bid for the company on April 18, 2016. This valued CVT at $1.65 billion and was subject to customary regulatory and shareholder approvals. The deal closed on November 28, 2016 and the Fund earned a 4.53% annualized return.
Pipeline Deals:
TheEmpireDistrictElectricCompany(1.5%ofnetassetsasofDecember31,2016)(EDE –$34.09–NYSE) (EDE, Financial) is a regulated utility company with operations in Missouri, Kansas, Oklahoma, and Arkansas. On February 9, 2016, EDE entered into an agreement to be acquired by Algonquin Power & Utilities Corp. for $34 cash per share. This transaction values EDE at $2.4 billion dollars, and is subject to regulatory and shareholder approvals. The merger closed on January 1, 2017.
WhiteWave Foods Inc. (1.7%) (WWAV – $55.60 – NASDAQ) (WWAV, Financial) is a food and beverage company based in Denver, Colorado. WhiteWave focuses on branded plant based food and beverages. Two of its most popular product lines are the “Silk” Almond Milk, and “So Delicious” branded products. WhiteWave agreed to be acquired by Danone for $56.25 cash per share in a $12.5 billion merger. Shareholders already approved the merger and regulatory approval is pending. The merger is expected to close in the first quarter of 2017.
Joy Global Inc. (1.1%) (JOY – $28.00 – NYSE) (JOY, Financial) is a mining equipment company based in Milwaukee, Wisconsin. Joy Global manufactures mining equipment for the extraction of metals and minerals and also provides clients with the servicing of this machinery. On July 21, 2016, Komatsu entered into a $28.30 cash per share merger with Joy, valued at $2.8 billion. Shareholders already approved the deal and regulatory approvals are pending in various jurisdictions. The deal is expected to close in mid-2017.
Brocade Communications (0.9%) (BRCD – $12.49 – NASDAQ) (BRCD, Financial) is a San Jose, California-based computer networking company. Brocade supplies networking hardware and software in addition to servicing to a wide variety of business across the world. On November 2, 2016, Brocade entered into a $12.75 cash per share merger with Broadcom. This values the company at $5.9 billion and the deal is subject to customary regulatory approvals and a shareholder vote. We expect the deal to close by the end of October 2017.
ClarcorInc.(1.4%)(CLC –$82.47–NYSE) (CLC, Financial) is a Franklin, Tennessee based filtration products company. Parker Hannifin announced it would acquire Clarcor for $83 cash per share or $4.3 billion on December 1, 2016. The deal is subject to shareholder and regulatory approvals and is expected to close in the first quarter of 2017.
EnduranceSpecialtyHoldingsLtd.(1.1%)(ENH – $92.40 –NYSE) (ENH, Financial) is a Bermuda-based holding company which underwrites specialty insurance. It operates in two segments, insurance, and reinsurance. On October 5, 2016, the company agreed to be acquired for $93 cash per share by SOMPO Holdings Ltd of Japan. This would value the company at $6.3 billion in the transaction. Subject to regulatory approval and a shareholder vote, the deal is expected to close in February.
Mentor Graphics Corp. (1.0%) (MENT – $36.89 – NASDAQ) (MENT) is a Wilsonville, Oregon-based supplier of electronic design automation tools. This includes both the hardware and software needed to automate various mechanical and electronic processes in factory machinery. On November 14, 2016, Siemens offered shareholders $37.25 cash per share in a $4.5 billion transaction. Subject to regulatory and shareholder approvals we expect the deal to close in the second quarter of 2017.
TeamHealthHoldings,Inc.(0.8%)(TMH –$43.45–NYSE) (TMH) is a Knoxville, Tennessee-based healthcare facility company. The company provides professional medical staff sourcing to hospitals and other healthcare providers across the United States. On October 31, 2016, the firm entered into a deal with The Blackstone Group LP for a $43.50 cash per share merger. This values TMH at $6.1 billion, and is subject to both regulatory and shareholder approvals with the addition of a “go-shop” period for which to explore other offers. We expect the deal to close in the first quarter of 2017.
TimeWarnerInc.(0.4%)(TWX –$96.53–NYSE) (TWX) is a New York, New York-based entertainment company. Through a variety of brands like HBO, Turner, and Warner Bros, the company produces and distributes a wide variety of entertainment and media products. On October 22, 2016, AT&T Inc agreed to acquire Time Warner for $53.75 cash + $53.75 worth of AT&T stock, subject to a collar. The deal requires both shareholder and regulatory approval and values Time Warner at $108.7 billion. It should close prior to year end 2017.
Vascular Solutions, Inc. (VASC) (0.4%) (VASC – $56.10 – NASDAQ) is a Minneapolis, Minnesota-based medical device company. VASC is engaged in the development and sale of medical diagnostic equipment specializing in the treatment and detection of cardiovascular related health issues. On December 2, 2016, the company agreed to a $56 cash per share merger with Teleflex Inc. which values VASC at $1 billion. The deal is subject to traditional regulatory and shareholder approvals and it should be completed in the first half of 2017.
SkyPlc (SKYB) (0.3%)(SKYB –$12.21–LON) is a London, England-based media company primarily engaged in pay television and broadcasting services, as well as broadband and telephone services. On December 15, 2016, Twenty-First Century Fox entered into an agreement to acquire the outstanding shares that it does not already own of Sky. FOXA offered 10.75 GBP per share, requiring regulatory approval and shareholder approval. The deal is expected to close in 2017.
January 6, 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.
