Based on Timken’s financial disclosures, its Bearings and Steel Businesses each compare favorably to peers’ as measured by return on invested capital, operating margins, and revenue growth. Separating the businesses will illuminate the dramatic operating improvements made at the Bearings Business and the transformation underway at the Steel Business. This process will enable investors to appropriately value the improved earnings profile of the businesses. Therefore, it is logical that both businesses would trade at multiples near the high end of their peer range.
Now is the Optimal Time to Separate the Businesses
Now is the optimal time to separate the businesses because the costs of a sub-optimal business mix compound over time. By focusing management on optimally managing each independent business now, shareholders will be in a position to realize enhanced value from the elimination of the trading discount and the improved long-term operating performance of the underlying businesses. Timken’s $1.4B of balance sheet flexibility enables each entity to pursue optimal capital structures.
Relational’s Response to Timken Management Commentary
Timken management has twice spoken publicly regarding our proposal. In a November 29
press release responding to our Schedule 13D, management asserted that "[a]s a market leader in high-quality engineered steel products, our steel business leverages the same expertise and know-how that we apply across our businesses. 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. These synergies and benefits, coupled with a potential reduction in financial flexibility, among other factors, led the Board to conclude that the separation of the businesses at this time would not be in the best interests of Timken shareholders." More recently, during the Q&A of the Company’s Q4 earnings call on January 24
an investor asked management what criteria did the decision not to spin-off the steel business hinge on and what factors would make the decision to spin the steel business more attractive in the future. Management responded “…if you dive to the next level of the analysis, you very quickly come to some of the pension issues that Glenn talked about that we actually are valued at a premium from a cash flow point of view largely because of the pensions. You come to issues of growth and then you come to issues of earnings volatility and sustainability. And we have been implementing over the past half-dozen years of very aggressive strategy that is addressing those and we continue to have steps that we can take…”
However, these points that management has tried to make do not hold up to close analytical scrutiny: