Fundamental Change to Valuation
As the Board is aware from prior discussions based on our analysis, we presented compelling evidence that a separation of the Steel Business would fundamentally change the way the market values Timken’s businesses. Specifically, the Steel Business would be valued and classified as a “materials” company and the Bearings Business would remain an “industrial” company. Unfortunately, the response we received from and subsequent public statements by management continue to discount the value available to shareholders from a separation of the two businesses. As reasoned in our Schedule 13D, and sustained by a number of analysts and shareholders, management is incorrect in its belief that the existing trading discount will dissipate with improving returns and decreasing volatility in the Steel Business. As we have explained to the Board and as reflected in the sentiment of the analysts cited above, even if such improvements come to fruition, the Company will continue to trade at a discount due to the widely divergent characteristics of the businesses. Management and the market recognize that these two divergent businesses require different working capital, capital investments, business processes, manufacturing techniques, and management talents to achieve optimal performance.
Timken’s stock price outperformed the S&P MidCap 400 Index by 11% on the day 4 we publicly put forward our recommendation to split the businesses in order to unlock shareholder value. The stock has since outperformed the Index by an additional 12% 5. A significant portion of this stock price appreciation, we believe, is the result of shareholder anticipation of a separation of the Steel Business. Yet, even with this stock appreciation, based on peer multiples, Timken’s share price continues to trade at a meaningful discount to the sum of its parts valuation as shown in the chart below:
|2013||Pension||2013 EBITDA||Peer||Enterprise||Equity Val.|
|EBITDA*||Addback||Ex. Pension||Multiple||Value||Per Share|
|Value per Share||$71.07|
|*Totals to 2013 FactSet Consensus EBITDA of $861M minus $25M of incremental corporate expense|
A Separation Will Increase Management and Investor FocusWe, and others in the investment community, are confident that separating the two businesses will allow the Company to optimally manage each business independently, leading to improved performance and more efficient capital allocation. Our analysis demonstrates that a separation will eliminate current misunderstandings of the businesses, allow investors to focus on valuing pure-play assets, and alleviate the investment community’s concerns about poor capital allocation.
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