Whitworth Urges Timken to Spin Off Steel Unit
Ralph Whitworth’s Relational Investors LLC and California State Teachers’ Retirement System took stakes in Timken Co. to urge the bearings maker to spin off its steel unit, spurring the stock’s biggest gain since 2009.
Relational owns 5.7 percent of shares and the California retirement plan known as Calstrs has 0.4 percent, according to a filing with the U.S. Securities and Exchange Commission. Calstrs, the second-biggest U.S. pension plan, submitted a proposal to be voted on at the next Timken annual meeting that recommends hiring an investment bank to sell the steel unit as a separate company.
Relational, which has $6 billion of assets and has used shareholdings in companies such as Illinois Tool Works Inc. (ITW) to push for change, met in August with Timken management and board members to recommend the spinoff. The hedge fund, now the largest single investor in Timken based on data compiled by Bloomberg, said the two businesses don’t fit, with the steel unit being a materials company and the bearings one classified as an industrial.
Timken evaluated Relational’s spinoff plan with input from outside financial advisers and decided against it, Chief Executive Officer James Griffith said in a statement. Over the years, the company has studied the separation of the two units, he said.
“We have significant technology, cost and revenue synergies between our bearing and steel businesses as well as diversification benefits in continuing to operate under our current structure,” Griffith said.
“The unquantified synergies that the company points to in defending the structure are far outweighed by the value that could be unlocked in separating the businesses,” Whitworth said this evening in a telephone interview. “The diversification of the company is actually what is causing the discount of stock, which is severe. We think it is up to 50 percent.”
Timken’s shares should trade higher compared with peers, Gary Farber, an analyst with CL King & Associates in New York, said in a telephone interview. Diversified industrial companies trade at an enterprise value that’s seven to eight times greater than earnings before interest, taxes, depreciation and amortization, and Timken trades at four to five times, Farber said.
“The stock is undervalued, and the company should command a higher valuation as it is today,” Farber said.
In its proposal, Calstrs said the stock is undervalued because of the “combination of two incongruent businesses,” according to the filing. The split wouldn’t “destroy any existing synergies” because the steel unit only provides 10 percent of the material the bearings business uses, the pension fund said, citing information from a 2011 Timken investor conference.
“The bigger companies that are competing with them in those businesses operate independently,” Whitworth said. “The fact that they source from steel companies wouldn’t be an impediment to separating.”
Still, it can be costly to separate companies and it would create two sets of management for the steel and ball bearing businesses, which are both profitable, said Eli Lustgarten, an analyst with Longbow Research, in a telephone interview.
“The question is, ‘Will it improve the shareholder value versus the long-term benefit to the company?’ That’s where the debate is,” Lustgarten said. “There’s no clear-cut answer to this.”
Relational becomes the largest single shareholder, ahead of the Timken Foundation, which has a 5.3 percent stake, according to data compiled by Bloomberg. Members of the founding family, including Chairman Ward J. Timken Jr., control the foundation. Family members in aggregate have sole or shared voting power over 10.3 percent of the company’s shares, according to a March filing. There are no voting agreements or other arrangements among the members of the Timken family regarding their shares, according to the filing.
Illinois Tool agreed in August to sell a majority stake in its decorative surfaces division for $1.1 billion after pressure from Relational to reduce the number of business units. Relational owns a 3.1 percent stake in Illinois Tool, the seventh-largest investor, according to data compiled by Bloomberg.
To contact the editor responsible for this story: Ed Dufner at firstname.lastname@example.org