Relational Investors, CalSTRS Urge Timken Co. (TKR) to Split

February 19, 2013 3:59 PM EST
Shares of Timken Co. (NYSE: TKR) are higher Tuesday after Relational Investors and California State Teachers Retirement System (CalSTRS), which together own 7.31 percent of the company, urged the separation of Timken's steel and bearings businesses to unlock significant value for all shareholders.

Among the main points contained in their letter to the Board are:

  • A Separation Will Enable a Fundamental Change To Valuation: The Company trades at a steep discount due to the widely divergent characteristics of its businesses, and a separation of the Steel business would fundamentally change the way the businesses are valued by the market.
  • A Separation Will Increase Management And Investor Focus: The Company will be able to optimally manage each business independently, leading to more efficient capital allocation and the potential to trade at multiples near the high end of their peer range.
  • Spin-Off Transactions Have Created Substantial Value For Shareholder’s In The Past:
    - Timken’s closest bearings peer, SKF, separated its steel business and returned 59% vs. Timken’s return of 10% over the same period.
    - Marathon Oil separated its refining operations and the stock returned 40% compared to only 10% for the S&P 500 Energy Index over that time period.
  • Now Is The Optimal Time To Separate The Businesses: The costs of a sub-optimal business mix compound over time, so now is the time to focus on optimally managing each independent business.
  • Separation Should Not Be Disruptive To Timken and the Community: A separation should not meaningfully disrupt the Canton community or Timken’s employees. The Timken name and Canton headquarters can and should survive with both businesses operating as independent entities.
  • The Timken Company Has A History Of Poor Corporate Governance: The Timken Family holds 3 of 11 Board seats; the $9M compensation received by executive Chairman Ward Timken, Jr., is grossly out of line with other executive chairmen in Timken’s peer group; the Company’s pay-for-performance scheme received a “D” rating in 2012 by Glass Lewis, a prominent independent proxy advisory service; and the Board has consistently demonstrated its unwillingness to seriously consider strategies to increase shareholder value.

    "Our sum-of-the-parts valuation suggests a $69 target price ($52 + $17). However, given the disparate nature of the assets and investors’ preference for pure plays, we believe that an above-average conglomerate discount is likely required to entice investors. Assuming a 20% discount to the sum-of-the-parts valuation yields a price target of $55/share. A case could be made for a narrowing of the conglomerate discount if the management signaled a potential separation."

    "Our sum of the parts... suggests a valuation closer to $55, but we agree that the market is unlikely to properly reward either the steel or the bearing business for the secular improvements they have made as long as these businesses remain combined,"

    For more notable holders of Timken Co. stock click here. For more information on Relational Investors click here.

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