Timken Jumps After Agreeing to Spin Off Steel Unit

Timken Co. jumped to its highest price in at least 35 years after agreeing to spin off its steel unit, dropping opposition to a plan pushed by Ralph Whitworth’s Relational Investors LLC.

Chief Executive Officer James Griffith, 59, will step down once the division is split from the larger bearings and transmission business, probably in about a year, Timken said yesterday. The publicly traded steel company will have $1.7 billion in annual revenue and be led by Ward Timken, 46.

“The ‘aha’ moment” for the board came after meeting with the largest shareholders in recent months and finding that most backed the spinoff, Griffith said in an interview yesterday. “The perception was that we would not see a revaluation of the company quickly -- that it would take a long time.”

Timken, based in Canton, Ohio, rose 2.9 percent to $62.02 at 9:58 a.m. in New York, after reaching $62.60, the highest price since at least Jan. 4, 1978. The stock rose 46 percent through yesterday since the day before Relational disclosed its stake in the company in November and began agitating for a breakup. That beat the 28 percent jump for the Standard & Poor’s Midcap Industrials Index.

The spinoff is a victory for Relational and the California State Teachers’ Retirement System, which had been pushing Timken since November to separate the steel unit to boost shareholder value. The proposal won support of 53 percent of stockholder votes in May and led to a strategic review by Goldman Sachs Group Inc. that favored the split.

‘Textbook Case’

The plan “ensures the long-term vitality and competitiveness of Timken as two separate companies, both of which will lead their respective industry segments for operating excellence,” Whitworth said in a statement yesterday from Relational and Calstrs.

Without the split, investors have been forced to buy two units with different business profiles, Gary Farber, an analyst at CL King & Associates in New York, said in an interview yesterday. The bearings unit gets about 35 percent of sales from the aftermarket and is less cyclical than the steel company, which has little replacement revenue or service, he said.

“This is a textbook case for enhancing valuation,” said Farber, who has a buy rating on Timken. “What unfortunately couldn’t be recognized in the companies together, we think will be recognized in the companies as separate entities.”

‘Less Volatile’

Relational, which takes stakes in companies it considers undervalued and then lobbies for changes, said in May that the shares could rise an additional 20 percent to 25 percent under the spinoff plan. San Diego-based Relational held 7.9 percent of Timken as of Aug. 2, making it the largest shareholder.

One-time transaction costs for the spinoff are expected to be about $125 million, Timken said in a statement yesterday. Richard Kyle, 47, will become president and CEO of the global bearings and power transmission company, which will operate under the Timken name. The business is expected to have annual revenue of $3.4 billion. The split is expected to be completed within a year. Jones Day is advising Timken on the steel unit spinoff.

Assets, liabilities and debt will be divided between the two companies with the aim of keeping investment-grade status for both, Chief Financial Officer Glenn Eisenberg said in a telephone interview yesterday. Timken will probably file a draft of the proposed capital structures to the Securities and Exchange Commission by the end of the year, Eisenberg said.

“The bigger bearing business -- more global, less volatile -- arguably can withstand higher leverage ratios than the smaller, more domestic steel business,” he said.

Timken had tried to fend off Whitworth’s call to shed the steel business, which traces its roots to World War I and generated about a third of last year’s $4.99 billion in revenue. The company hired Goldman Sachs to study the spinoff after a majority of voting shareholders supported the plan.

Sales in the steel unit fell 29 percent in the second quarter from a year earlier, due to lower demand in the oil and gas and industrial markets, Eisenberg said on a July 25 conference call.

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