Relational Investors LLC (“Relational”) announced today that Relational and the California State Teachers Retirement System (“CalSTRS”), collectively owners of 7.31% of The Timken Company, (NYSE: TKR) (“Timken” or “the Company”), have sent a joint letter to the Board of Directors of Timken urging a separation of Timken’s steel and bearings businesses to unlock significant value for all shareholders.
Relational had previously presented a detailed analysis to Timken’s management and Board on August 23, 2012. In that analysis, Relational demonstrated the deep undervaluation of Timken’s shares due to the company’s conglomerate structure. By separating the steel and bearing businesses, Timken would realize improved operating performance and the investment community could appropriately value the earnings profile of each business – resulting in maximized shareholder value and long-term potential for these businesses and the communities that they serve.
In their letter, Relational and CalSTRS highlight key aspects of this analysis as well as recent excerpts from third-party analyst reports, demonstrating broad support by the investment community for a separation of Timken’s businesses.
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.