NEW YORK (The Deal) -- Ellwood Group's recent move to rapidly accumulate a significant minority stake in TimkenSteel (TMST) - Get Report has touched off a debate over whether the steel producer could be an acquisition target and, if so, by what sort of entity.

Executives at Canton, Ohio-based TimkenSteel have said they have had a "long and valued" relationship with Ellwood, which produces stainless steel and specialty alloys. As such, Ellwood is a customer, supplier and even competitor of TimkenSteel.

Some industry watchers said they believe Ellwood might want to ultimately acquire or put together some sort of combination with TimkenSteel as a liquidity event for its owners. Others insisted that the accumulation of shares indicates that a bigger potential buyer could be lurking in the shadows.

In any event, interviews with analysts, bankers, proxy solicitors and activist investors indicate that acquiring TimkenSteel could be a tough but feasible play for an insurgent fund looking to shake things up and drive a value-improving deal. An informal poll of analysts following the company suggested that it will likely be sold in the next two to five years and that an activist could help expedite such a move. Indeed, one high-profile insurgent investor said he has heard from many people that TimkenSteel could become an activist target.

The activity comes even though TimkenSteel was formed as a publicly traded company only last July. With a $1.2 billion market capitalization and $185 million in long-term debt, the company was spun off in 2012 from Timken (TKR) - Get Report under pressure from Relational Investors.

Yet TimkenSteel's extensive exposure to commodities could complicate an activist effort or acquisition -- and any insurgency is more likely to succeed once oil and gas prices stabilize. The company's products are used in the oil and gas extraction business, which has been hobbled by low commodity prices.

TimkenSteel CEO Tim Timken represents the fifth generation of his family to oversee the business and his kin are expected to object to a sale in today's environment of low commodity prices. Gabelli analyst Justin Bergner said Timken management might not want to consider a sale until the $200 million continuous caster it's developing is fully ramped up. The full value of the caster, intended to convert molten metal into steel more efficiently, won't be realized until it's fully operational -- something not expected to take happen until next year.

Nevertheless, both an activist and a banker following the company suggested that TimkenSteel could be a potential target for an insurgent fund simply because it was recently spun off. "Spinouts in general are a good place to look because there is usually a significant chance for operational improvements when you have a management team generating value themselves itself rather than [when the company is just] part of a larger conglomerate," the activist said.

Gregg Feinstein, managing director and head of mergers and acquisitions at Houlihan Lokey, said that TimkenSteel like other pure-play spinoffs could become an acquisition target as it might fit in synergistically with a larger company. Initially he stocks of spinoffs often don't trade well because they have "unnatural holders" from before the divestiture who might be not interested in having a high level of direct exposure to a particular sector, Feinstein said, adding that this can result in the spinoff's being temporarily undervalued.

Must Read:Bullish Options Traders Are Targeting Nucor, Other Steelmakers

And what about the Ellwood Group investment? On Thursday the privately owned company reported a boost in its TimkenSteel stake to 8.55%, up from 6.47% in February and 5.34% in January.

Bergner said the Ellwood Group can be viewed as that of a strategic investor that's helping prevent further weakening of TMST's stock price in the currently challenged commodity price environment so that any bid would be sufficiently high enough to meet TimkenSteel's interests and the big shareholder's. "If their presence helps solicit a sufficiently high bid then clearly as an 8.55% stake owner they would benefit," he said.

If propping up TimkenSteel's stock price was the goal, the Ellwood investment hasn't worked very well. The shares this week traded at about $25.45 a share significantly lower than its all-time high of nearly $50 a share in September.

Yet the Ellwood investment (as an effort to limit further price weakness) could be a defensive action to discourage international steel producers from acquiring TimkenSteel in the near term -- a move that could enable Ellwood to acquire it or engage in a merger down the road, Berger added.

Why would Ellwood be eyeing a deal? There might be succession issues at the private company. Ellwood is controlled by roughly 25 family members who could be seeking a liquidity event and it might be positioning itself to merge with Timken, said Bergner, adding that Ellwood CEO David Barensfeld is in his early 70s and hasn't publicly announced his successor. "If there was a succession plan in the Barensfeld family you might have expected that by now," he said.

Other potential buyers for TimkenSteel include big players Tenaris (TS) - Get Report, Vallourec, U.S. Steel (X) - Get Report, Nucor (NUE) - Get Report and Steel Dynamics (STLD) - Get Report, according to Bergner. 

An activist could try to raise pressure for TimkenSteel  to be sold to one of these larger buyers. Thomas Sandell of Sandell Asset Management recently held less than 1% of TMST shares, according to a Feb. 13 securities filing, but it's unclear if the fund would launch any campaign.

APB Financial Group analyst Kim Opiatowski said she doubted that TimkenSteel's board would let an activist drive a sale in the near future due to current low commodities prices. If Ellwood's intentions are to buy TimkenSteel, then today's low price environment is a good time for doing so, she said.

An investor interviewed questioned whether an activist could succeed in driving a deal, adding that strategic operating businesses would be the only ones interested. Private equity firms, this source said, would be unlikely to obtain financing for a deal in light of a Jefferies report citing low EBITDA expectations for the next three quarters.

Any activist attempting a proxy contest to drive a deal might run into technical difficulties: TimkenSteel has staggered director elections, which means an insurgent couldn't take over the board in one fell swoop. Shareholders seeking to call a special meeting, which can expedite a proxy fight, need to have 50% of the outstanding shares, a very high hurdle.

TimkenSteel and Ellwood would represent a formidable force if they teamed up to block an activist campaign. In a director election, the combined 8.55% Ellwood stake and 10.5% Timken family stake would represent a major barrier for an activist seeking the selection of dissident directors.

Ellwood did not return calls but its regulatory filings state that the firm accumulated the shares based on the belief that they were undervalued and represented an attractive investment opportunity.

TimkenSteel said it was not looking to be acquired and declined to comment on the Ellwood investment beyond acknowledging its "long and valued relationship" with the other firm.

Must Read:Warren Buffett's Top 10 Stock Buys

Read more from

: