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Timken against steel unit spinoff talk

Keywords: Tags  Timken, steel business, bearings business, spinoff proposal, California State Teachers' Retirement System, Relational Investors, James Griffith, Corinna Petry

CHICAGO — Splitting Timken Co.’s bearings and steel businesses wouldn’t be in the best interests of the company’s shareholders, its management said in response to a proposed spinoff of the company’s steel division.

The California State Teachers’ Retirement System, along with asset management firm Relational Investors LLC and its principals, proposed the spinoff last week, according to a Schedule 13D filing with the U.S. Securities and Exchange Commission (SEC).

Discussions between the retirement system, the Relational Investors group—which together own 6.15 percent of Canton, Ohio-based Timken’s shares—and management were held in August, with the shareholders filing their formal proposal to spin off the steel business Nov. 28.

"Shareholders recommend that the board of directors and management ... engage an investment banking firm to effectuate a spinoff of Timken’s steel business segment into a separately traded public company," the filing states.

The steel unit produces billets, special bar quality and seamless tubing products.

The shareholders "believe the market sharply undervalues Timken due to its combination of two incongruent, core businesses and that a spinoff of the steel business ... would maximize shareholder value," the proposal states.

Timken’s bearings and steel businesses each compare favorably to their peers as measured by return on invested capital, operating margins and revenue growth, but its valuation multiples "are significantly discounted to peers in their respective industries," the filing said. The shareholders are looking for a "pure play" for each business unit as steel is misunderstood by some investors, they said.

"Timken is always open to constructive input from shareholders and has had meetings with Relational to listen to their views," president and chief executive officer James W. Griffith said in a statement. "Over the years, we have carefully evaluated separating the steel and bearing businesses. This includes a thorough review with our board this summer of Relational’s proposal, with input from outside financial advisors."

There are significant technology, cost and revenue synergies between the bearings and steel businesses, as well as diversification benefits in continuing to operate under Timken’s current structure, Griffith said.

"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," he said.

Spinning off the steel business "would not destroy any existing synergies created by the integration," Relational Investors said, because Timken has said it sells only 10 percent of its steel to its bearings and power transmission group, meaning 90 percent is sold to external customers.

The retirement system and asset managers are seeking the support of other shareholders for their proposal.

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