CHICAGO Looking to
persuade Timken Co. to spin off its steel business from its
bearing operations, Relational Investors LLC claims that
independent equities analysts support the view that the two
should be separated "to unlock significant value for all
Samuel Eisner, research analyst
at William Blair Co. LLC, Chicago, and co-author of one of the
reports cited by Relational Investors and the California State
Teachers Retirement System (CalSTRS) in support of the spinoff,
agreed that in the long run such a move would create
shareholder value, although he cautioned that the timing
Steel demand from end markets
must be returned to health "before a separation should take
place," Eisner told AMM.
If the spinoff were today,
"given current utilization rates, Im not sure there is
enough (production) volume to generate the appropriate level of
cash to fund the (current capital) investment on a stand-alone
basis," he said. "The company was valued at $55 per share
before this process started, without what I view as an activist
investor distorting the share price. Short-term institutional
investors are playing the trade alongside what CalSTRS and
(Relational) have announced and propped up the share price
without a core fundamental improvement in the companys
main end markets."
Relational in San Diego and
CalSTRS calculated Timkens true value at $71.07 per share
in a Feb. 19 letter to chairman Ward J. Timken Jr. At $55.48
Feb. 20, they were 21.9 percent below that value.
The argument for a pure play
steel company is compelling to investors, Christopher Plummer,
managing director of Metal Strategies Inc., West Chester, Pa.,
Timken is spending $225 million
to upgrade and expand capacity at its Faircrest plant in
While Timkens 1.5 million
tons of capacity is small in relation to the 100-million-ton
U.S. steel market, it is a big player in special bar quality,
alongside Nucor Corp., Charlotte, N.C.; Republic Steel, Canton;
and Gerdau Special Steel North America, Jackson, Mich.
"Timken has a higher revenue due
to a richer average product mix. It probably would make sense
to spin it off. and then it could be purchased by one of the
existing players," Plummer said. "Always, for investors and
acquirers, pure plays are better, easier to understand.
Theres no dilution of value."
In many cases, however, activist
shareholders plans do not come to fruition.
Timken leadership met twice with
the shareholder group but rejected its proposal (
amm.com, Dec. 3).
The points management "has tried
to make do not hold up to close analytical scrutiny (and are)
not supported by empirical evidence," Relational claims, adding
that it has "received phone calls from the investment community
that have increased our confidence that shareholders would
support a spinoff" and believes its message has gained
Asked during a Jan. 24 earnings
call about talks the board has had regarding this proposal,
Timken president and chief executive officer James W. Griffith
said directors agreed the companys stock is "undervalued
from an earnings point of view." However, outside of pension
liabilities, "we actually are valued at a premium from a cash
flow point of view."