“Our sum-of-the-parts valuation suggests a $69 target price ($52 + $17). However, given the disparate nature of the assets and investors’ preference for pure plays, we believe that an above-average conglomerate discount is likely required to entice investors. Assuming a 20% discount to the sum-of-the-parts valuation yields a price target of $55/share. A case could be made for a narrowing of the conglomerate discount if the management signaled a potential separation.” 1

“Our sum of the parts … suggests a valuation closer to $55, but we agree that the market is unlikely to properly reward either the steel or the bearing business for the secular improvements they have made as long as these businesses remain combined.” 2

“In the long run, however, we agree with Relational and CalSTRS’s positioning that the company would perform better if it separated into two separate entities. As only 10% of steel volumes are used in the bearings business, vertical integration is limited. Also, given the highly volatile nature of the steel industry (steel operating profit fell $320M over four quarters in 2009), we believe that Timken’s valuation multiple is negatively affected, particularly during an upcycle. Management has confirmed this since we started covering the company in 2009. While there are multiple issues to splitting up the company, … we believe that the bearing business could be revalued given the high-margin nature and large emerging market exposure that garners higher growth rates. Given high profitability and specialized nature of the steel product, we believe the steel business could be floated at relatively solid multiples…” 3

Given the analysis we have presented to Timken and analyst support for a separation of the businesses, the Board should not continue to allow management to obstinately take the position with the investment community that a spin-off of the Steel Business is not in the best interest of shareholders at this time, without providing any credible rationale for this position. In the months since our May meeting, management has had ample access to the investment community to make its case for the Company’s “conglomerate” structure. Likewise, we cannot find any analyst reports that make a strong argument against separating the Steel and Bearing Businesses and unlocking the Company’s true value for all shareholders.

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