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Timing off for Timken spinoff: analyst

Keywords: Tags  Timken, James Griffith, Relational Investors, California State Teachers Retirement System, spinoff, steel business, Samuel Eisner, William Blair Christopher Plummer


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 shareholders."

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 isn’t perfect.

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, I’m 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 company’s main end markets."

Relational in San Diego and CalSTRS calculated Timken’s 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., told AMM.

Timken is spending $225 million to upgrade and expand capacity at its Faircrest plant in Canton, Ohio.

While Timken’s 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. There’s 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 traction.

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 company’s 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."


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