Gabelli Value Plus delivered a net asset value (NAV) total return of 36.2% during the year to 31 March 2017. The U.S. stock market delivered a total return of 17.2% in U.S. dollars over the year, which translated into a return of 34.4% for sterling investors. So, the NAV total return was ahead of the return on the U.S. market as a whole. The share price total return was 48.8% as the discount narrowed. A final dividend of 1.2 pence per share is proposed (2016: 0.3 pence).
Extract from the manager’s report
“Spin-off activity was healthy in 2016, although down from 2014/2015. Notable spin-offs in the portfolio included the separation of Hertz’s equipment rental unit (HERC) from the car rental business; the spin-off of Honeywell’s nylon business, AdvanSix; the spin-off of Johnson Controls’ automotive interiors business, Adient; and the continued transformation of ConAgra under CEO Sean Connolly with its spin-off of potato processor Lamb Weston.
As could be expected, Dr. John Malone contributed to our list of new securities with the spin-off of Liberty Expedia from Liberty Ventures and the issuance of three new tracker stocks: Liberty SiriusXM, representing a 64% stake in SiriusXM radio; Liberty Braves, representing ownership of the Atlanta Braves baseball club and related real estate; and Liberty Media, accounting for a variety of public and private assets, including a 35% stake in Live Nation Entertainment. It is worth noting that prior spins provide fertile ground for deals, as illustrated by the involvement of a spin-off parent or child in so many of the transactions below.
We were the beneficiaries of another strong year of M&A as well. Two deals announced in 2015 involving significant holdings – the long awaited purchase of Cablevision and Carl Icahn’s purchase of Pep Boys – closed during 2016. January began with Johnson Controls agreeing to acquire Tyco International in a $14 billion stock deal. This was followed in February by Apollo’s agreement to acquire ADT, the home security spin- off of Tyco, for $42 per share in cash. Both transactions have closed. Other announced deals include: Couche-Tard’s $48.53 per share cash offer for CST Brands, the convenience store spin-off of Valero; German chemical manufacturer Lanxess AG’s $33.50 per share cash offer for Chemtura; and Rockwell Collins’ $62 per share cash offer for BE Aerospace, an aerospace components company that spun-off its distribution arm KLX in 2014.
The biggest merger of the year belonged to AT&T, which, after acquiring satellite distributor DIRECTV in 2015, set its sights on leading content producer and serial financial engineer Time Warner. AT&T has agreed to pay $107.50 per share in cash and stock in a transaction that will garner scrutiny in Washington, but we think is likely to succeed. Finally, at this writing, there is speculation that 3G Capital and Berkshire Hathaway/Warren Buffett have identified their next meal in the global food space – Mondeléz, which was formerly part of 3G’s current acquisition vehicle, Kraft-Heinz.
In our view, more accommodative regulatory agencies, a potential windfall of repatriated offshore cash, and historically low but prospectively higher interest rates should continue to drive M&A and benefit our style of investing.
Private Market Value with a Catalyst(TM)- Selected Portfolio Holdings
We have included below a discussion of ten portfolio holdings that meet our Private Market Value with a Catalyst(TM) approach and which we expect to generate positive returns for our shareholders. Quoted prices are as at 31 March 2017.
Bank of New York (BK – $47.22 – NYSE) is a global leader in providing financial services to institutions and individuals. The company operates in more than one hundred markets worldwide, and strives to be the global provider of choice for investment management and investment services. As of 31 December 2016, the firm had $30.0 trillion in assets under custody and $1.7 trillion in assets under management. Going forward, we expect BK to benefit from rising global incomes and the cross border movement of financial transactions. We believe BK is also well positioned to grow earnings in a rising interest rate environment, given its large customer cash deposits and significant loan book.
DISH Networks Corp. – (DISH – $63.49- NASDAQ) is the fourth largest pay television provider in the U.S., serving approximately 14 million subscribers through its original satellite business and newer Sling Internet delivered over-the-top offering. Founder Charlie Ergen owns approximately 53% of DISH’s shares. DISH has accumulated a significant spectrum position at attractive prices. DISH could monetize its spectrum through a sale of the spectrum or the whole company, or, more likely, a partnership with an existing wireless operator.
Edgewell Personal Care Co. (EPC -$73.14 – NYSE), based in St. Louis, Missouri, is the renamed Energizer Holdings, Inc. following the tax- free spin-off to shareholders of the household products division on 1 July 2015. Edgewell generates approximately $2.4 billion of revenue through its principal businesses: wet shaving, including Schick- branded razors and blades, Edge, and Skintimate shaving preparation and private label shaving products; sun care, including the Banana Boat and Hawaiian Tropic brands; feminine care, Playtex and o.b. tampons and Carefree and Stayfree liners and pads; and infant care, utilizing the Playtex and Diaper Genie brands. As a pure-play personal care company, Edgewell competes in attractive, high margin, categories with leading brands. We expect management to focus on improving margins through product mix, restructuring savings, and operating leverage, which should afford it flexibility to reinvest in growth opportunities. The company has approximately $1.3 billion of net debt, providing management with sufficient flexibility to invest in internal growth, make acquisitions and/or repurchase shares. EPC is a likely acquisition target, as a multinational competitor with an extensive global infrastructure would benefit from scale, cost synergies, as well as growth from international expansion.
HERC Holdings Inc. (HRI – $48.91- NYSE), based in Bonita Springs, Florida, is the third largest equipment rental company in the United States, after United Rentals and Sunbelt Rentals (owned by Ashtead). HRI was spun out of former parent Hertz on 30 June 2016. Underemphasized as part of a significantly larger car rental company, HRI now has the opportunity to improve profitability to levels more commensurate with peers as a standalone entity. Ultimately, we view HRI as an attractive acquisition candidate.
Kaman Corp. (KAMN – $48.08 – NYSE) is a diversified company serving the aerospace, defense, and industrial markets. The Aerospace segment manufactures aircraft bearings, precision fuses, helicopter components, and subcontracted aerostructure work. In the Distribution segment, the company distributes power transmission, motion control, and material handling products to a broad range of industries. While growth in the Distribution segment is still hampered by low oil prices, profitability in the segment is expected to improve as productivity initiatives start to bear fruit, and 75%-80% of the costs are behind KAMN. Aerospace margins will be slightly lower this year as the majority of fuzing sales will be sold to the U.S. government, which are less profitable than sales to foreign governments.
Mueller Water Products Inc. (MWA – $11.80 – NYSE) is one of the most recognized brands for products used in the transmission, distribution, and measurement of water in North America. The company possesses one of the largest installed bases of fire hydrants and iron gate valves in the U.S., and is thus well positioned to benefit from the expected increases in both water infrastructure spending and new residential construction. In addition, Mueller has a fast growing water metering and leak detection business designed to take advantage of the large shift to advanced metering in the water industry. In early 2017, MWA announced the sale of its Anvil business for $315 million and the appointment of J. Scott Hall as President and CEO. The cash generated from the sale and the company’s consistent cash flow generation should further enable Mueller to expand its portfolio of industry leading products for the water infrastructure market, as well as increase returns of capital to shareholders.
National Fuel Gas Co. (NFG – $59.61- NYSE) is a diversified natural gas company. NFG owns a regulated gas utility serving the region around Buffalo, New York, gas pipelines that move gas between the Midwest and Canada and from the Marcellus to the Northeast, gathering and processing systems, and an oil and gas exploration and production business. NFG’s regulated utility and pipeline businesses, as well as its California oil production business, provide stable earnings and cash flows to support the dividend, while the natural gas production business offers significant upside potential. While natural gas prices have been depressed over the past few years, NFG’s ownership of 780,000 acres in the Marcellus Shale holds enormous natural gas reserve potential, and the company has proven to be among the lower cost producers. We continue to expect above average long term earnings and cash flow growth from improving gas prices, growing gas production, and strategically located pipeline expansion. The company has increased its dividend for 46 consecutive years.
Navistar International Corp. (NAV -$24.60 – NYSE), based in Lisle, Illinois, manufactures Class 4-8 trucks, buses, and defense vehicles, as well as diesel engines and parts for the commercial trucking industry. NFC, a wholly owned subsidiary, provides financing of products sold by the company’s truck segment. In September, Navistar and Volkswagen (VW) Truck & Bus announced a long anticipated strategic alliance, in which the two truck manufacturers would share technology and purchasing efforts in exchange for VW taking a $256 million stake (16.6%) in Navistar. The deal, which closed on 1 March 2017, confirmed our thesis that NAV would eventually be targeted by a larger global capital equipment manufacturer. We believe this initial investment should lead to an eventual full purchase in the years ahead.
Republic Services Inc. (RSG – $62.81 – NYSE), based in Phoenix, Arizona, became the second largest solid waste company in North America after its acquisition of Allied Waste Industries in December 2008. Republic provides non-hazardous solid waste collection services for commercial, industrial, municipal, and residential customers in thirty-nine states and Puerto Rico. Republic serves more than 2,800 municipalities and operates 192 landfills, 204 transfer stations, 333 collection operations, and 64 recycling facilities. Since the Allied merger, Republic has benefited from synergies driven by route density, beneficial use of acquired assets, and reduction in redundant corporate overhead. Republic is committed to its core solid waste business. While other providers have strayed into alternative waste resource technologies and strategies, we view positively Republic’s plan to remain steadfast in the traditional solid waste business. We expect continued solid waste growth acquisitions, earnings improvement, and incremental route density and internalization growth in already established markets to generate real value in the near to medium term, highlighting the company’s potential.
Viacom Inc. (VIA-$48.65 – NASDAQ) is a pure play content company that owns a global stable of cable networks, including MTV, Nickelodeon, Comedy Central, VH1, BET, and the Paramount movie studio. Viacom’s cable networks generate revenue from advertising sales, fixed monthly subscriber fees and ancillary revenue from toy licensing, etc. We believe a low valuation and M&A potential outweigh the secular risks of cord-cutting.”
GVP : Spin offs help unlock value for Gabelli Value Plus