To Our Shareholders,
For the quarter ended December 31, 2015, the net asset value (“NAV”) per Class AAA Share of The Gabelli ABC Fund increased 1.1% compared with an increase of 3.6% 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 0.03%. See page 2 for additional performance information.
Overview
In the fourth quarter of 2015, global deal volume totaled $1.6 trillion, a 50% increase over the third quarter1. Total deal volume for the entire year was $4.7 trillion. This represents an increase of 42% over the same period last year, marking the busiest year on record. Surprisingly, overall deal count was relatively flat versus 2014; significantly more deals over $10 billion in size drove volumes this year.
Geographically, cross border mergers and acquisitions (M&A) increased 27% over the same period last year to $1.6 trillion, accounting for 37% of total deal volume. Domestic activity increased 64% versus 2014 and totaled $2.3 trillion across roughly 10,000 deals. European M&A increased by 7.7% over 2014 to $907 billion during 2015. In addition, Asia Pacific (ex-Japan) deal volumes totaled $1.1 trillion for the same period, a 63% increase over 2014, despite the slowdown in China. Deal volumes were driven by larger deals rather than an uptick in the number of deals. Japanese M&A also increased at roughly the same rate, up 64% to $99.6 billion over the same period last year. Japanese companies were quite acquisitive in terms of outbound deals, with American companies (i.e., insurance firms) as targets.
Healthcare overtook Energy and Power as the most active sector in the M&A market during 2015, accounting for roughly 14% of deal volume. The largest deal of 2015, Pfizer Inc.’s acquisition of Allergan PLC, involves two companies in the healthcare space. Despite the curb in inversions in late 2014, healthcare consolidation continued as these transactions still had fundamental rationale. Energy and Power and Technology rounded out the top three sectors of deal activity, both with roughly 13% of global deal volume.
Companies are likely to continue to look to deals in order to accelerate their growth. Several factors are conducive to deal making, including open debt markets for lending and high cash levels on corporate balance sheets. Furthermore, now that the Fed has finally raised interest rates, albeit slightly, deal spreads should widen, as they have done historically. 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. Further Fed action will perpetuate this further. The Fund should benefit from these factors and the continued surge in M&A.
Positions Closed
DealerTrack Technologies Inc. (TRAK, Financial), based in Lake Success, New York, provides digital solutions for all major segments of the automotive industry. On June 15, 2015, Cox Automotive announced it would be purchasing DealerTrack for $63.25 per share in a $4 billion deal. The transaction closed on October 1, 2015, after receiving shareholder and regulatory approvals. The Fund earned a 3.85% annualized return.
HCC Insurance Holdings Inc. (HCC, Financial), based in Houston, Texas, is an international specialty insurer. On June 10, 2015, Tokio Marine Holdings announced that it would acquire HCC in a transaction worth $7.5 billion, or $78 cash per HCC share. The deal successfully closed on October 27, 2015 after receiving shareholder and regulatory approvals. The Fund earned a 7.28% annualized return.
IPC Healthcare Inc. (IPCM, Financial) is a leading national acute hospitalist and post-acute provider based in North Hollywood, California. It has 400 hospitals and 1,700 post-acute facilities across the United States. On August 4, 2015, TeamHealth Holdings, Inc. announced that it would acquire IPC for $80.25 cash per share in a $1.6 billion merger. Despite an offer being made for TeamHealth prior to its completion of the IPC deal, IPC shareholders approved the merger and all of the necessary antitrust clearances were in place for a close on November 23, 2015. The Fund earned a 6.54% annualized return.
Kythera Biopharmaceuticals Inc. (KYTH, Financial), based in Westlake Village, California, is a global biopharmaceutical company that focuses on developing and commercializing medical aesthetics products. On June 17, 2015, Allergan (0.1% of net assets as of December 31, 2015) announced it would acquire Kythera in a merger worth $1.9 billion or $75 per share. Initially the transaction was to be comprised of cash and stock, but on August 5, Allergan amended the terms of the offering to all cash. The transaction closed on October 1, 2015, after receiving regulatory and shareholder approval. The Fund earned a 2.00% annualized return.
Thoratec Corp. (THOR, Financial), headquartered in Pleasanton, California, designs, manufactures, and sells products to treat the full range of clinical needs for patients suffering from advanced heart failure. On July 22, 2015, St. Jude Medical announced that it would acquire the company for $63.50 cash per share in a merger worth $3.4 billion. Following regulatory and shareholder approval, the transaction closed on October 8, 2015. The Fund earned a 4.87% annualized return.
Sigma-Aldrich Corp. (SIAL, Financial) is a leading life science and technology company based in St. Louis, Missouri that manufactures and distributes more than 230,000 chemicals, biochemicals, and other essential products to more than 1.4 million customers globally. On September 22, 2014, Merck KGaA, a German multinational pharmaceutical and chemical company, announced that it would acquire Sigma-Aldrich for $16.7 billion, or $140 cash per share. After a lengthy regulatory review in Europe, the deal was completed on November 18, 2015. The Fund earned a 3.14% annualized return.
ZS Pharma Inc. (ZSPH, Financial) is a pharmaceutical company based in Coppell, Texas that developed a drug to treat hyperkalemia. On November 6, 2015, AstraZeneca plc (0.3%) announced it would acquire ZS Pharma in a $90 cash per share or $2.7 billion tender. The deal received regulatory approvals quickly and a majority of shareholders tendered. The deal closed on December 17, 2015 and the Fund earned a 4.90% annualized return.
Deals in the Pipeline
AGL Resources Inc. (less than 0.1% of net assets as of December 31, 2015) (AGL – $63.81 – NYSE) (AGL, Financial), based in Atlanta, Georgia, is an energy services holding company with operations in natural gas distribution, retail operations, wholesale services, and midstream operations. On August 24, 2015, Southern Company announced it would acquire AGL for $66 in cash per share, or $12 billion. The transaction would create the second largest utility company by customer base in the U.S. Subject to regulatory and shareholder approvals, the deal is expected to close in the second half of 2016.
Airgas Inc. (2.1%) (ARG – $138.32 – NYSE)(ARG, Financial) 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. as well as clearance by the Committee on Foreign Investment in the United States.
Cablevision Systems Corp. (0.7%) (CVC – $31.90 – NYSE) (CVC, Financial), based in Bethpage, New York, owns and operates cable systems in the U.S. and is the leading operator in the New York metropolitan area. On September 17, 2015, Altice N.V. agreed to acquire Cablevision for $9.7 billion or $34.90 per share in cash. The transaction reiterates Altice’s desire to continue to expand its presence in the U.S. market. Subject to shareholder and regulatory approvals, the deal is expected to close in the first half of 2016.
Cameron International Corp. (less than 0.1%) (CAM – $63.20 – NYSE)(CAM, Financial) is a Houston, Texas based provider of flow equipment products, systems and services to worldwide oil and gas industries. On August 26, 2015, it was announced that Schlumberger would be acquiring Cameron for $14.8 billion. Under the terms of the merger, Cameron shareholders will receive 0.716 shares of Schlumberger and $14.44 cash for per share. Following shareholder and regulatory approvals, the transaction is expected to close in the first quarter of 2016.
Cleco Corp. (1.7%) (CNL – $52.21 – NYSE)(CNL), headquartered in Pineville, Louisiana, is a utility holding company. On October 20, 2014, the company agreed to be acquired by an investor group led by Macquarie Infrastructure and Real Assets and British Columbia Investment Management Corporation. Cleco shareholders will receive $55.37 per share in cash, or $2.7 billion. The transaction is subject to regulatory and shareholder approvals and is expected to close in the first quarter of 2016.
Dyax Corp. (2.2%) (DYAX – $37.62 – NASDAQ) (DYAX) 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 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 is structured to include $37.30 cash per share at closing, along with a contingent value right (CVR) potentially worth $4.00. The CVR is tied to the FDA approving DX-2930 by 2019. The deal closed on January 22, 2016.
Italcementi SpA (0.2%) (IT – $11.14/€10.25 – Milan Stock Exchange) (MIL:IT), based in Bergamo, Italy, is the fifth largest cement producer in the world. On July 28, 2015, HeidelbergCement announced it would acquire a 45% stake in the company through a tender offer worth €3.7 billion, or €10.60 per share. The remaining 55% will be purchased through another tender offer with the same terms, at a later time. Following regulatory approval, the transaction is expected to close in 2016.
PartnerRe Ltd. (1.6%) (PRE – $139.74 – NYSE) (PRE), is a Bermuda based global reinsurance company. On January 26, 2015, the company announced that it would merge with AXIS Capital Holdings Limited in a transaction worth $5.3 billion. In early April, investment company EXOR S.p.A., offered to acquire PartnerRe for $130 per share in cash. On August 3, 2015, PartnerRe eventually agreed to sell to EXOR S.p.A for $140.50 cash per share, or $6.9 billion. The company has received the required shareholder vote, and upon receipt of regulatory approvals, the company expects the transaction to close in the first quarter of 2016.
The Pep Boys – Manny, Moe & Jack (0.4%) (PBY – $18.41 – NYSE) (PBY) is a service and automotive aftermarket company based in Philadelphia, Pennsylvania. On October 26, 2015, the company received a cash tender offer by Japanese tire manufacturer Bridgestone valued at approximately $800 million ($15.00 per share). On December 4, activist investor Carl Icahn (Trades, Portfolio) disclosed a 6.6 million share (~12%) stake in the company, followed by a $15.50 per share cash offer. This overbid sparked a bidding war between the two parties which culminated in the company entering into a revised tender offer with Carl Icahn (Trades, Portfolio) at $18.50 cash per share. The deal has already received antitrust approval, and is expected to close shortly after the expiration of the tender offer on February 2, 2016.
Precision Castparts Corp. (1.9%) (PCP – $232.01 – NYSE) (PCP), based in Portland, Oregon, manufactures complex metal components and products for the aerospace, power, and general industrial markets. On August 10, 2015, the company announced that it would be purchased by Berkshire Hathaway for $235 cash per share in a merger worth $32.3 billion. The transaction is expected to close in the first quarter of 2016, after receiving shareholder and regulatory approvals.
StanCorp Financial Group Inc. (3.9%) (SFG – $113.88 – NYSE) (SFG), is a Portland, Oregon based financial services company. On July 23, 2015 the company was acquired by Meiji Yasuda Life Insurance Company for $115 cash per share, in a merger worth $4.9 billion. The transaction includes a 25 day go-shop period, in which StanCorp can solicit other potential bidders to make an offer. Following the go-shop period and after receiving shareholder and regulatory approvals, the transaction should close in the first quarter of 2016.
TECO Energy Inc. (less than 0.1%) (TE – $26.65 – NYSE) (TE), headquartered in Tampa, Florida, is an energy related holding company with regulated electric and gas utilities in Florida and New Mexico. On September 4, 2015, Emera Inc. announced that it would acquire TECO for $27.55 cash per share in a merger worth $10.4 billion. The merger is expected to close in mid-2016, and is subject to shareholder and regulatory approvals.
TNT Express NV (1.0%) (TNTE – $8.47/€7.79 – Amsterdam Stock Exchange) (TNTE) is a Dutch logistics company operating in the global express parcel delivery industry. On April 7, 2015, the company received a €4.4 billion cash tender offer from global logistics and freight company FedEx Corp. TNT was previously the subject of a failed takeover by UPS, which was blocked by the European Commission. Unlike this previous attempt, the FedEx tender has already been approved by regulators in the U.S. and Europe. The tender is currently pending regulatory approval in China and Brazil, among other jurisdictions, and is expected to close in the second quarter of 2016.
January 22, 2016
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.
