Relational and CalSTRS Assert That Timken's Shareholder Presentation is Flawed and Misleading
Shareholders Urged To VOTE FOR CalSTRS Proposal
SAN DIEGO--(BUSINESS WIRE)-- Relational Investors LLC ("Relational") and the California State Teachers' Retirement System ("CalSTRS"), collectively owners of 7.28% of the shares of The Timken Company, (NYS: TKR) ("Timken" or "the Company"), today stated that an investor presentation filed this morning by Timken presents a highly flawed and misleading analysis with respect to the CalSTRS proposal to spin off Timken's Steel business to unlock shareholder value. The spinoff would create two publicly traded Timken entities - Steel and Bearings - ending the conglomerate discount which has consistently impaired the company's stock price. Relational, Timken's largest independent, public shareholder, fully supports the CalSTRS proposal, which is before shareholders for the Company's annual meeting on May 7, 2013.
Ralph Whitworth, founder and principal of Relational, stated, "It is shocking that Timken would underestimate its shareholder's intelligence by using such erroneous analysis as justification to not unlock value for Timken shareholders. In our numerous conversations with many of Timken's largest shareholders, there is a consensus view that the Company should spinoff the Steel business."
The facts are straightforward and Timken, try as it might, can't hide or justify these realities:
Since November 15, 2012, shortly before Relational and CalSTRS filed their Schedule 13D advocating for the separation of Timken's Steel and Bearings businesses, Timken's stock price has outperformed its peers by 41%, or over $15 per share.
Timken's Board must know that if it maintains the Company's conglomerate structure rather than separate its businesses as recommended in the CalSTRS shareholder proposal, there is a significant risk that the price of Timken's shares will fall precipitously.
Timken's synergies analysis is highly flawed and contrived. It does not reflect the clear opportunity to mitigate dis-synergies as SKF did following the separation of its businesses and, which we cited in our Timken shareholder presentation. Indeed the mid point of Timken's projected dis-synergies of $6-8 per share is no more than $2.65 per share higher than what we projected in our conservative analysis. And, as Timken knows or should know, there is ample opportunity to mitigate this incremental dis-synergy through supply arrangements.
Timken intentionally uses many analyst sum-of-the-parts valuations from November and December of last year, which are out-of-date. The three valuations from 2013 that Timken includes average $66, an 18% increase from the current stock price.
Timken uses its three year share price performance to justify its conglomerate business strategy. But this performance includes the stock's outperformance of its peers since the November 28th joint 13D filing by Relational and CalSTRS.
Timken accuses Relational of applying an 18x P/E ratio to its Bearings business versus 14x for peers. However, Timken chooses to ignore the impact of its poor capital structure. If Timken used $1 billion in new debt to buy back its stock - thereby approaching typical peer leverage ratios - the Bearings company's P/E ratio would decline to 16x. We are confident that the Bearings business would trade at premium to peers based on the Company's own growth forecasts that are much higher than peers.
Timken is clearly wrong about peer group analysis. A broadened peer group analysis does not change our conclusion that separation will result in enhanced shareholder value at Timken. Timken should know that broadening the peer group too much to include, for example, Japanese companies is inappropriate because their margins, geography, and products are not necessarily comparable.
Timken claims that if its businesses were separated, Steel would not have an investment grade credit rating. How does Timken know this? For example, ITT maintained an investment grade credit rating when it was spun out at a $1.7 billion market cap. And, in any case, as Timken knows or should know, it is more important for Timken to minimize its cost of capital rather than maximize its credit rating at the expense of a sub-optimal capital structure.
"In addition, we note that in a Reuters article following Timken's press release, Timken says that CalSTRS and Relational do not include transaction costs of $200 million in their analysis. This also is incorrect -the analysis in our shareholder presentation includes these transaction costs.
"Finally, it is not in shareholders' best interests for Timken to be trying to muddy the waters. We are confident that shareholders understand the facts and will VOTE FOR CalSTRS proposal to unlock value for all shareholders through the separation of Timken's Steel and Bearings businesses. Based on a consensus of security analyst views, the ongoing impaired nature of Timken's stock price, and expressions of support we are hearing from shareholders, our shareholder proposal is timely. We urge all shareholders to unlock shareholder value by VOTING FOR the CalSTRS shareholder proposal," Mr. Whitworth said.
To learn more about the CalSTRS proposal and how to unlock significant shareholder value at Timken by allowing the market to independently value Timken's Bearings and Steel businesses as pure plays in their respective industries please visit www.UnlockTimken.com.
Shareholders are urged to VOTE FOR PROPOSAL #6. If you have questions about how to vote your shares, please contact our information agent, Okapi Partners at (877) 285-5990.
About Relational Investors LLC:
Relational Investors LLC, founded in 1996, is a privately held, multi-billion dollar asset management firm and registered investment adviser. Relational invests in publicly traded companies that it believes are undervalued in the marketplace. The firm seeks to engage the management, board of directors, and shareholders of its portfolio companies in a productive dialogue designed to build a consensus for positive change to improve shareholder value.
About the California State Teachers Retirement System: The California State Teachers' Retirement System, with a portfolio valued at $161.5 billion as of February 28, 2013, is the largest educator-only pension fund in the world. CalSTRS administers a hybrid retirement system, consisting of traditional defined benefit, cash balance and voluntary defined contribution plans, as well as disability and survivor benefits. For 100 years, CalSTRS has served California's public school educators and their families, who now number 862,000 from the state's 1,600 school districts, county offices of education and community college districts.
Kekst and Company
Robert Siegfried/Daniel Yunger or Donald C. Cutler
212-521-4800 or 415-852-3903
Okapi Partners LLC
Bruce H. Goldfarb/Charles W. Garske/Geoffrey Sorbello
KEYWORDS: United States North America California
The article Relational and CalSTRS Assert That Timken's Shareholder Presentation is Flawed and Misleading originally appeared on Fool.com.
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