Recent Annual Report - Gabelli

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• Second, we focus on companies whose public price is meaningfully less than our estimate of their Private Market Value (PMV), or what an informed buyer would pay to own the entire enterprise. This “margin of safety” provides us with significant upside potential and downside protection. Note that PMV is not static; it should grow along with a company’s assets and cash flow potential. Whether a security’s public price keeps pace with PMV growth can determine whether its margin of safety waxes or wanes. • Finally, we attempt to articulate one or more catalysts that will narrow a company’s discount to PMV. Catalysts can take many forms including mergers and acquisitions (M&A) activity, financial engineering such as spinoffs and buybacks, change in management, evolution in regulation, completion of a major project or introduction of a new product. As portfolio managers our job is to balance the above considerations: a high quality company with a near and certain catalyst could warrant a smaller margin of safety than the converse situation. Our aim is to maximize returns while minimizing the potential to permanently impair capital. We seed the portfolio with a diverse basket of ideas that can be harvested regularly at irregular intervals. Over time we have demonstrated this is the best way to generate superior returns. Deals, Deals, and More Deals After accelerating into year-end, worldwide M&A activity rose 2% in 2012 to $2.6 trillion. Several Fund holdings were subject to takeovers throughout the year. In May, Thomas & Betts was acquired by Swiss industrial giant ABB for $72 per share in cash, giving ABB a greater presence in the low-voltage electrical products market. In August, Robbins & Myers agreed to be taken over by National Oilwell Varco for $60 per share. In December, Eaton Corp. (0.1% of net assets as of December 31, 2012) completed its acquisition of Cooper Industries. Private label food manufacturer Ralcorp (0.2%) announced that it agreed to be acquired by ConAgra Foods for $90 per share in November. In December, Intermec (0.1%) agreed to be acquired by Honeywell (2.8%) for $10 per share. As noted in prior commentaries, 2012 brought a continuation of the trend of “financial engineering,” as companies surfaced value with spin-offs, split-offs, or the sale of a division. Ralcorp spun off Post Holdings, its branded cereal business, in January. At the end of June, Sara Lee paid a $3.00 per share special dividend and separated into two companies: Hillshire Brands (0.3%), a U.S. based producer and marketer of branded meat products, and D.E MASTER BLENDERS 1753 (0.5%), a Netherlands based coffee and tea company. In October, Kraft completed the spin-off of its North American retail business, Kraft Foods Group (0.2%), and renamed itself Mondelez International (0.4%), focusing on its higher-growth global snacks business. That same month, Tyco (0.5%) completed its business separation, with the “new” Tyco becoming a pure-play global fire and commercial security firm following the spin-off of its residential and small business alarm monitoring business ADT Corp. (0.5%) and the merger of its flow control business with Pentair Ltd. (0.1%), a global water focused pump and valve maker. Gaylord Entertainment completed its sale of the Gaylord Hotels brand and management company to Marriott International, and converted itself to a REIT structure, renaming itself Ryman Hospitality Properties (1.0%). Others are still in process, including News Corp. (1.5%), which will separate its extensive publishing operations from its faster-growing entertainment division. We believe many of these companies – as well as those that underwent financial engineering in 2011, such as Beam (0.9%), Exelis (0.3%), and Xylem (0.6%) – are potential takeover candidates. While the future is always impossible to predict, we are encouraged by continued ample cash on corporate balance sheets and financing availability at nearly unprecedented low interest rates. We believe that with increased visibility on future tax rates and regulations, we will see a continuation of the “Fifth Wave” of takeover activity in 2013 and beyond. 6
Let’s Talk Stocks The following are stock specifics on selected holdings of our Fund. Favorable earnings prospects do not necessarily translate into higher stock prices, but they do express a positive trend that we believe will develop over time. Individual securities mentioned are not necessarily representative of the entire portfolio. For the following holdings, the percentage of net assets and their share prices stated in U.S. dollars or U.S. dollar equivalent terms are presented as of December 31, 2012. ADT Corp. (0.5% of net assets as of December 31, 2012) (ADT - $46.49 - NYSE) is a Boca-Raton, Florida based provider of electronic alarm monitoring products and services to U.S. residences and small businesses. The company is a subsidiary of Tyco International Ltd. (0.5%) and boasts strong brand recognition for its brands ADT, ADT Pulse, and Companion Service. ADT dominates the market even in the highly competitive alarm monitoring industry and will likely retain its market share alongside continued growth in the electronic security industry at large. The company expects consistent free cash flow generation in the near term due to a recently approved share repurchase program set to last three years and expire in November 2015. AMC Networks Inc. (2.1%) (AMCX - $49.50 - Nasdaq) owns and operates cable networks: AMC, WE tv, IFC, and The Sundance Channel. In addition, the company owns IFC Entertainment, an independent film distribution company, and AMC Network Communication, a network programming origination and distribution company. The AMC channel is highly rated and has benefited from growing popularity in an attractive and affluent demographic which should aid advertising sales. AMC offers the potential for levered equity returns and could be an attractive acquisition candidate to a number of large cable network operators. CBS Corp. (4.2%) (CBS - $37.98 - NYSE) operates the CBS television network, the premium cable network Showtime, owns 29 local television stations, 130 radio stations, and the third largest international outdoor advertising network. We believe CBS has a number of opportunities to generate incremental non-advertising revenue from the sale of existing content to OVDs (online video distributors) and through retransmission consent agreements with traditional distributors. In addition, we expect a continued recovery in advertising, especially in radio and outdoor, to contribute to earnings growth. Finally, we believe financial engineering, including the announced $3 billion share buyback or a potential spin-off of CBS Outdoor, could act as a catalyst for shares. CIRCOR International Inc. (1.0%) (CIR - $39.59 - NYSE) is a manufacturer of highly engineered products for the energy, aerospace, and flow control markets. In the energy market, the company makes ball, needle, butterfly, gate, and other valves for the drilling, production, separation, and transmission of oil and gas for large international energy projects and for small-to-medium size projects within North America. In the aerospace group, CIR manufactures landing gears, precision valves, pressure switches, regulators, actuators, and electric motors for air transports, cargo aircraft, regional jets, business airplanes, helicopters, and unmanned vehicles. In the flow control market, the company makes valves, fittings, and controls for the power generation, HVAC, steam, and industrial process markets. In December 2012, Bill Higgins stepped down as the company’s President and CEO to pursue other interests. Wayne Robbins, President of the Flow Technologies group was appointed acting President and CEO and the board has initiated a search process to identify a permanent President and CEO. In spite of the change in leadership, we believe the company is well positioned for future earnings growth driven by higher investments in the energy market, the increase in production of commercial aircraft, and more infrastructure investments in developed and developing countries. Diageo plc (3.3%) (DEO LN - $116.58 - NYSE) is the leading global producer of alcoholic beverages, with brands including Smirnoff, Johnny Walker, Ketel One, Captain Morgan, Crown Royal, J&B, Baileys, Tanqueray, and Guinness. The company has a balanced geographic presence in both mature and emerging markets, and benefits from the trend of consumers around the world trading up to premium branded products. In 2011 and 2012, Diageo made several acquisitions that enhanced its presence in emerging markets: Mey Icki, the leading spirits company in Turkey; Shui Jing Fang, a leading Chinese baiju producer, Ypioca, the leading cachaca producer in Brazil; and an increased stake in Halico, the leading domestic spirits producer in Vietnam. Diageo 7
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Page 3 and 4: Barron’s 2013 Roundtable Mario J.
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Recent Annual Report - Gabelli

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