Mario Gabelli Offers 3 Takeover Targets

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Investing in a stock as a potential takeover target has never really been a strategy that I have employed. However, one prominent investor and billionaire has made a living on doing just that. Mario Gabelli, Chairman and CEO of GAMCO Investors, has had some big wins over the years buying larges stakes in companies that were later sold for multiples of his original investment.

Mr. Gabelli recently appeared on CNBC and shared with viewers three stocks he believes could be potential takeover targets. However, it is important to keep in mind that Mr. Gabelli generally has a very long time horizon, so don’t expect any deals to occur soon. Think years, not months.

Riding a rough road with Navistar

First on the list is long-time GAMCO holding Navistar International Corporation (NYSE: NAV)(NYSE: NAV)(NYSE: NAV), which according to Mr. Gabelli, his clients own in a range of 10% to 12%, and he is continuing to gobble shares. In addition, notable investor Carl Icahn is the owner of nearly 15% of the stock and sits on the board of directors.

Navistar is a manufacturer of large trucks, buses, and defense vehicles under the International brand as well as engines and parts. The International brand is a global and well known in its respective industries.

It has been a rocky road for Navistar since it was revealed that the company’s engine did not meet the 2010 Environmental Protection Agency emissions standards. In July 2012, the company announced a change to its strategy regarding and now will follow technologies similar to other engine manufacturers. During the interview, Gabelli admitted to not realizing early enough that the company did not have a backup plan regarding EPA emissions standards.

Mr. Gabelli sees Fiat Industrial and its chief Sergio Marchionne as a possible wildcard which may look to further consolidate the sector. Fiat Industrial and CNH Global recently agreed to merge and Mr. Marchionne was quoted in a Bloomberg article stating the merged companies “will have the flexibility to pursue growth and consolidation opportunities when they arise.”

Mr. Gabelli did make it clear that in the short-term there may be some “potholes” in the road for Navistar.

Taking a bite out of Hillshire Brands

Hillshire Brands Company (NYSE: SLE)(NYSE: SLE)(NYSE: SLE) is the former Sara Lee Corporation and changed its name after spinning off its international coffee and tea business. This left Hillshire with brands such as Jimmy Dean, Ball Park and its namesake, Hillshire Farm.

Since the spin-off, Hillshire Brands is refocused and is nearly one year into its three-year strategic growth plan. Gabelli believes it is executing on this plan which will provide a catalyst to move the stock higher over the next three to five years.

This stock is not without some risks as issues may exist with higher costs of pork and potentially lower demand. Just last month, Hormel Foods Corporation lowered its 2013 guidance due to weakness in its pork and refrigerated foods as well as higher costs. Mr. Gabelli sees this as a possible opportunity and would like to see it result in a 10% drop in the stock.  He has been a buyer at $33.

Hillshire Brands is currently trading at around $34 per share and Mr. Gabelli believes this is a $45 - $50 stock with the potential for more. And that's with or without a potential merger or buyout.

Eating Post for breakfast

Mr. Gabelli finished the conversation mentioning Post Holdings (NYSE: POST)(NYSE: POST)(NYSE: POST), which is the product of the Ralcorp and Conagra takeover dance.  If you remember, Ralcorp attempted to fend off overtures from Conagra by attempting to sell Post. After efforts to sell Post failed, Ralcorp decided to spin off the unit.

Post got its start back in 1892 when inventor Henry Drushel Perky and partner William Henry Ford invented a machine that shreds whole wheat and created Shredded Wheat cereal. Shortly thereafter in 1895, C.W. Post introduced a cereal beverage known as Postum. Mr. Gabelli admits this history that spans over 100 years yields much comfort and confidence.

The brands of Post include the aforementioned Shredded Wheat as well as Grape Nuts, Honeycombs, Alpha-Bits, Pebbles, and other cereals. While these brands alone may be attractive to a potential suitor, Mr. Gabelli is buying more than a company, he is buying a “gifted” CEO.

Bill Stiritz led Ralston Purina and later Ralcorp with great success that Mr. Gabelli believes will be repeated at Post. He is confident Mr. Stiritz, who has done a couple of deals already, will build Post into a very attractive company over the next five years. The market cap for Post is a modest $1.5 billion and Mr. Gabelli believes this is a good hunting ground for investors.

Final thoughts

Buying stocks based on their attractiveness as takeover candidates is tough, but I don’t think that's what made Mr. Gabelli successful at picking such stocks. With each pick, he also pointed out that there were other long-term reasons to own the companies.

In the case of Navistar, he stated the company will produce $15 billion in revenue and $1 billion of EBITDA over the next few years. Hillshire is in the midst of a turnaround that's looking good so far. Post is an iconic brand led by Bill Stiritz, who has a proven track record. Whether you believe in these stocks or not, don't bet against Mario Gabelli.

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