To Our Shareholders,
For the quarter ended June 30, 2017, the net asset value (“NAV”) per Class AAA Share of The Gabelli ABC Fund increased 0.8% compared with an increase of 1.6% 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 0.2%. See page 2 for additional performance information.
Commentary
Global deal activity increased 2% on a year over year basis through the first half of 2017 to total $1.6 trillion¹. We witnessed a larger average deal size, as the number of deals announced during the first half of 2017 decreased 4% from 2016 levels to 22,752. On the contrary, the number of deals valued at more than $1 billion increased 14% compared to the first half of 2016. On a sequential basis, deal activity accelerated in the second quarter, increasing 6% to $822.6 billion versus $775.8 billion in the first quarter. Year-over-year deal volumes fell 6% for the second quarter.
Cross border merger and acquisition (M&A) activity totaled $630.9 billion in the first half of 2017, the highest level reached in the first half of a year since 2007. This surge in cross border transaction activity was driven by outbound U.S. acquirers and an increase in appetite for European assets. M&A activity in Europe totaled $449 billion in the first half of the year, up 33% on a year over year basis. Although U.S. acquirers breached their borders to search for assets, Chinese acquirers reduced their appetite for foreign assets, as China outbound M&A declined 49% compared to the first half of 2016.
As we saw in the first quarter of 2017, the energy and power sector continued to fuel M&A activity, with deal activity in the space totaling $240.6 billion in the first half, up 29% on a year over year basis. Real Estate and Industrials rounded out the top three most active sectors in the first six months of 2017.
As the Federal Reserve continues to raise rates, it is important to recall that historically there has been a positive correlation between interest rates and arbitrage spreads. This is due to the fact that the spread is driven by the risks inherent to a particular deal as well as the risk-free rate. Typically, as the risk free rate rises, so too do annualized spreads. Corporations continue to have high cash balances and an appetite to grow inorganically, which we anticipate will continue to drive M&A into the future.
Done Deals
Actelion LTD. is an Allschwil, Switzerland based biotech company. Actelion discovers, develops, and distributes drugs targeting pulmonary arterial hypertension. On January 26, 2017, Actelion agreed to be acquired by Johnson & Johnson for $280 cash per share in a $30 billion tender. Immediately prior to the completion of the transaction, Actelion spun out its drug discovery operations into a newly created Swiss Biotech company “Idorsia” which was listed on the SIX Swiss Exchange. The transaction closed June 16, 2017. Given the Idorsia spinoff, we will not be providing an annualized return figure for this deal.
AdvancePierre Foods Holdings, Inc. (APFH, Financial) is a Blue Ash, Ohio based food processing company that primarily distributes ready-to-eat sandwiches. APFH agreed to be acquired by Tyson Foods, Inc. (TSN) on April 25, 2017 for $40.25 in cash per share in a tender offer. The transaction required APFH shareholders to meet the minimum condition of the tender and regulatory approval. APFH and TSN completed the deal on June 8, 2017. The Fund earned a 7.21% annualized return.
Air Methods Corp. (AIRM, Financial) is an Englewood, Colorado based healthcare facilities and services company. Air Methods core operations are focused on emergency transport services. A smaller piece of AIRM offers air tourism services to travelers. On March 14, 2017, Air Methods agreed to be acquired by American Securities LLC for $43 cash per share in a $2.5 billion tender. Completion of the transaction was contingent upon the satisfaction of the minimum tender condition and regulatory approvals. The deal closed on April 24, 2017. The Fund earned a 1.72% annualized return.
InvenSense Inc. is a San Jose, California based electronic equipment company that sells motion sensor technology to its customers. InvenSense agreed to be acquired by TDK Corp. on December 21, 2016 for $13 per share or $1.3 billion. The transaction required shareholder and regulatory approvals and closed on May 18, 2017. The Fund earned a 5.15% annualized return.
JoyGlobalInc. 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 approved the deal and the companies received regulatory approvals in various jurisdictions. The deal closed on April 6, 2017. The Fund earned a 3.69% annualized return.
Mead Johnson Nutrition Co. is a Chicago, Illinois based nutrition company focused on the distribution of pediatric products. On February 10, 2017, MJN agreed to be acquired by Reckitt Benckiser Group plc for $90 cash per share, which valued the company at $17.9 billion. The deal was subject to regulatory and shareholder approval and closed on June 15, 2017. The Fund earned a 2.86% annualized return.
MultiPackagingSolutionsInternationalLtd.(MPSX) is a New York, New York, based paper and packaging company. On January 24, 2016, MPSX agreed to be acquired by WestRock for $18 per share in cash, representing a total enterprise value of $2.28 billion. The deal was subject to regulatory and shareholder approvals, and closed June 7, 2017. The Fund earned a 2.46% annualized return.
SyngentaAG (SYT) is a Basel, Switzerland based agricultural chemicals company. On February 3, 2016 Syngenta agreed to be acquired by ChemChina for $465 cash per share plus a CHF 5 special dividend. The tender offer was contingent upon SYT shareholders meeting the minimum condition and required regulatory approvals. Syngenta and ChemChina closed the deal on May 18, 2017. The Fund earned a 10.11% annualized return.
Zeltiq Aesthetics Inc. (ZLTQ) is a Pleasanton, California based medical technology company that licenses CoolSculpting, a noninvasive body sculpting procedure. ZLTQ agreed to be acquired by Allergan on February 13, 2017 for $56.50 cash per share. The deal required shareholder and regulatory approvals and closed on May 1, 2017. The Fund earned an 11.66% annualized return.
Pipeline
C.R.BardInc.(3% of net asset as of June 30 ,2017)(BCR–$316.11–NYSE)(BCR, Financial) is a New Providence, New Jersey based medical equipment company that distributes diagnostic and patient care products. BCR agreed to be acquired by Becton Dickinson and Co. (BDX) on April 23, 2017 for $222.93 cash + 0.5077 BDX per share stock. The transaction requires regulatory and shareholder approvals and is expected to close in the fall of 2017.
Kate Spade & Co.(1.3%)(KATE–$18.49–NYSE)(KATE, Financial) is a New York, New York based apparel and accessories retailer. On May 8, 2017 KATE agreed to be acquired by Coach, Inc. for $18.50 per share in cash representing a $2.4 billion enterprise value. The deal is contingent upon KATE shareholders meeting the minimum tender condition and it requires regulatory approval. The companies expect to close the transaction in the third quarter of 2017.
Panera Bread Co.(3.2%)(PNRA–$314.64–NASDAQ)(PNRA, Financial) company that operates over 2,000 locations in 46 states. JAB for $315 cash per share, representing $7.5 billion approval and a shareholder vote and is expected to close is a St. Louis, Missouri based restaurant services On April 5, 2017, PNRA agreed to be acquired by in enterprise value. The deal requires regulatory during the third quarter of this year.
Rite Aid Corp.(0.3%)(RAD – $2.95 –NYSE)(RAD, Financial) is a Camp Hill, Pennsylvania based retail drugstore chain. The company originally entered into a $17.2 billion merger with Walgreens Boots Alliance Inc, another international pharmacy operator, during October of 2015. The deal was marked by a lengthy and complex regulatory review which lengthened the timeline past its January 30, 2017 termination date. At that point, the deal was subsequently extended to June 30, 2017 and the price revised to $14.2 billion. Approaching this second termination date and due to opposition by the Federal Trade Commission, the parties restructured the deal to an asset sale whereby Walgreens Boots Alliance will acquire 2,186 Rite Aid Corp. stores across the country for a price of $5.175 billion and the payment of a $325 million termination fee associated with the original deal. The asset sale is expected to face a simpler antitrust approval process and reach its conclusion by the end of the year.
Time Warner Inc.(1.3%)(TWX–$100.41–NYSE)(TWX, Financial) is a New York, New York based entertainment company. Through a variety of brands, including HBO, Turner, and Warner Bros, the company produces and distributes a wide array of entertainment and media products. On October 22, 2016, AT&T agreed to acquire Time Warner Inc. for $53.75 cash plus $53.75 worth of AT&T stock, subject to a collar. The deal requires both shareholder and regulatory approvals, and values Time Warner at $108.7 billion. The transaction should close prior to year end 2017.
Tribune Media Co. (0.2%)(TRCO–$40.77–NYSE)(TRCO, Financial) is a Chicago, Illinois based broadcasting company with 42 television stations in operation. Tribune agreed to be acquired by Sinclair Broadcasting Group, Inc. for $35 in cash and 0.23 SBGI shares for a total deal price of $43.50 per share at announcement. The deal requires regulatory and shareholder approvals and is expected to close in the fourth quarter.
Westar Energy Inc.(1.9%)(WR–$53.02–NYSE)(WR, Financial) is a Topeka, Kansas based electric utility company. On May 31, 2016, Westar agreed to be acquired by Great Plains Energy for $60 per share — $51 in cash consideration and $9 in Great Plains Energy common stock, for a total value of $12.2 billion. The deal was subject to shareholder and regulatory approvals and was expected to close in the spring of 2017, however the Kansas Corporation Commission blocked the deal. The companies reworked the merger in early July such that it became an all-stock merger of equals that addressed many of the Commission’s concerns. Westar shareholders will now receive one share of the newly combined company and Great Plains’ holders will receive 0.5981 of these shares. The newly crafted merger is expected to close in the first half of 2018.
Whole Foods Market, Inc.(0.4%)(WFM–$42.11–NASDAQ)(WFM, Financial) is an Austin, Texas based supermarket chain that offers organic food products. Whole Foods Market agreed on June 16, 2017, to be acquired by Amazon for $42 per share in cash which valued the company at $13.7 billion. The transaction requires shareholder and regulatory approvals and is expected to close in the second half 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.
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.
