Separation of Bearings and Steel Businesses is Sound Strategy to Unlock Shareholder Value at the Timken Company
Relational and CalSTRS Urge Shareholders To Vote FOR The CalSTRS Proposal To Maximize Return On Investment In Timken
SAN DIEGO--(BUSINESS WIRE)-- The California State Teachers Retirement System ("CalSTRS") and Relational Investors LLC ("Relational"), collectively owners of 7.3% of The Timken Company, (NYS: TKR) ("Timken" or "the Company"), today sent the following letter to all Timken shareholders urging them to send a clear message to the Timken Board to unlock shareholder value at the company by VOTING FOR the CalSTRS shareholder proposal at the Annual Meeting of Timken's Shareholders on May 7, 2013.
The following is the letter.
Relational Investors LLC
California State Teachers' Retirement System
12400 High Bluff Drive, Suite 600
100 Waterfront Place, MS-04
San Diego, CA 92130
West Sacramento, CA 95605-2807
VIA ELECTRONIC AND OVERNIGHT MAIL
April 10, 2013
Dear Timken Shareholder:
As fellow shareholders of The Timken Company ("Timken" or the "Company"), we urge you to VOTE FOR the CalSTRS shareholder proposal included as Item No. 6 in Timken's 2013 Proxy Statement (the "Proposal"). The Proposal recommends that the Company promptly initiate a process to unlock substantial value by splitting Timken's stock, giving you shares in both the Company's Bearings and Steel businesses.
We, CalSTRS, the largest educator-only pension fund in the world, and Relational Investors, a multi-billion dollar asset management firm, own a combined 7.3% of Timken's outstanding shares valued at approximately $400 million. Like you, we are long-term investors and are focused on realizing the optimal value of our investment.
On November 28, 2012, the day we filed a joint 13D announcing the Proposal and our intent to work together, Timken's stock price increased 12% for a one-day return to Timken shareholders of approximately $450 million. Since then, Timken's stock price has continued to outperform industry peers. We estimate that up to $15 of this post-announcement appreciation is attributable to shareholders' support and positive analyst evaluations of a separation and related stock-split as recommended in the Proposal. The stock market's positive reaction to the announcement indicates that thestock-split we are proposing will eliminate the conglomerate discount that has persistently impaired Timken's investment value for shareholders.
Moreover, our analysis suggests the potential for an additional 30% in value or, in the aggregate, more than $1 billion in value for all shareholders by splitting Timken's stock. Based on rigorous share price analysis and independent research, we are convinced that this pure-play structure would allow the assets to thrive as independent businesses creating greater valueover the short, medium, and long term. Specifically:
The market will independently value Timken's Bearings and Steel businesses at a premium to the value under the current conglomerate structure;
A separation allows for a successful transformation of the Bearings business, which now generates high returns and significant cash flows; and
Timken's Steel business is specialized and has superior financial characteristics presenting strong upside opportunities.
There is no downside to voting FOR the Proposal, which creates a free option to benefit from further stock price appreciation. However, abstaining or voting against the Proposal will send a signal to the Board that it does not have to take action to maximize the value of Timken's stock price; will push the stock price down toward price levels existing prior to initiating our campaign; and will cement the market's view that the family-dominated Board will maintain the status quo. This could mean hundreds of millions of dollars of lost value.
Taking the action recommended by the Proposal would allow Timken's Steel and Bearings businesses to realize stock price levels consistent with Timken's peers, providing shareholders a much greater value on their total investment. In fact, Timken's closest peer, SKF Corporation, spun-off its steel business to its shareholders in 2005 to overwhelming shareholder praise.
We have tried for months to work with the Timken Board toward a similar result. Most recently, we accepted, in good faith, an invitation from Timken to meet with representatives from management and the Board. We were not only greeted with a preemptive, ill-intentioned press release, but the Company offered the same empty explanations for the conglomerate structure. Their arguments were feebly supported by misleading math and vague references to synergies it had previously and unsuccessfully conjured up for the media.
Acting to protect what we can only explain as self-interest, Timken's Board has launched an all-out public misinformation campaign to defeat the Proposal, wasting shareholder dollars on this value-diminishing effort. What do they have to protect? Here's just one example, Ward Timken Jr., the grandson of the Company's founder, has been paid $37 million dollars since he became executive Chairman in 2005, including $7.6 million in 2012 and $9 million in 2011. This is roughly three to four times the median pay for his position! Following our meeting, Timken sent and publicized a highly rhetorical "fight letter" opposing the Proposal and the stock price dropped $1.00 on the day. This immediate adverse market reaction underscores that the Company's logic is flawed. Here are a few critically unsound arguments we would like address:
Timken asserts that separating Bearings and Steel will result in a significant loss of synergies between the businesses.
Timken's synergies analysis is flawed and contrived . Incredibly, it ignores the clear opportunity to mitigate dis-synergies through customary and common business arrangements. This is exactly what Timken's closest competitor, SKF, did so successfully following the separation of its bearings and steel businesses. 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. There is ample opportunity to mitigate these incremental dis-synergies through normal and customary supply arrangements.
Timken asserts that Relational's sum-of-the-parts value estimate exceeds the median of analyst calculations.
Timken intentionally uses many out-dated analyst sum-of-the-parts valuations from November and December of last year . The three 2013 valuations that Timken does include average $66, an 18% increase from the current stock price, and that is after substantial excess price performance since we announced our Proposal.
Timken asserts that Relational applies too high of a multiple to Timken Bearings.
Relational's analysis is based on the assumption that Timken Bearings trades in-line with its closest peer, SKF, on EV/EBITDA multiples . The apparent P/E differential Timken clings to is based on the Company's poor capital structure and our conservative assumption that Timken Bearings' tax rate remains at 34% after the spin even though about 50% of its business is international. Once those factors are normalized, Timken Bearings trades in-line with SKF on P/E multiples as well as EV/EBITDA and cash flow multiples.
Timken asserts that the peer group Relational uses is too narrow.
A broader peer group analysis does not materially change our estimate of Timken's share price discount, nor does it change our conclusion that a separation will enhance Timken's shareholder value . Timken should know that broadening the peer group to include, for example, Japanese companies is inappropriate because their profit margins, geography, and products are not appropriately comparable.
Timken asserts that its diversification benefits shareholders.
Timken, however, relies on its three-year share price performance to justify its conglomerate business strategy. It misleadingly includes Timken's outperformance against its peers since November 28, when we announced our Proposal recommending a separation. Shareholders do not need Timken's Board to "diversify" for them; they are perfectly willing and, in fact, prefer to select pure-play investments and set weightings to suit their specific objectives. The significant discount investors apply to Timken's stock reflects the market's clear preference for pure-play steel or bearings alternatives. The irony of this argument is that diversification actually causes the discount!
Timken asserts that it practices good corporate governance.
The Timken family holds three of eleven Board seats, exhibiting real influence. The $9 million compensation for 2011 received by executive Chairman Ward Timken, Jr., is grossly out-of-line with other executive chairmen in Timken's peer group. The Company's pay-for-performance scheme received a "D" rating in 2012 from Glass Lewis, a prominent independent shareholder advisory service. In addition, the Board has a history of ignoring proposals that receive a majority shareholder vote. Finally, the Board has long been unwilling to thoughtfully consider maximizing long-term shareholder value through a separation.
Moreover, Timken is suddenly referring to itself as an "industrial solutions" company in yet another misguided attempt to get market buy-in for its conglomerate structure.
We, as shareholders, will only receive the full value of Timken's Steel and Bearings businesses if they are allowed to trade as independent businesses.
You are probably asking why the Board and management would oppose this powerful change. We, too, have asked ourselves why the Board and these corporate managers are working against the Proposal recommending a strategic separation to which the market has already responded positively. We can only find one plausible explanation and it lies in human behavior—the family-dominated Board is acting in their own interests at the cost of shareholders.
Exercise your right as owners to demand that the Board act in your best interests.
VOTE FOR maximum long-term share value.
VOTE to end Timken's conglomerate discount once and for all.
VOTE FOR the Proposal, Item No. 6 in your Proxy (See chart below).
We thank you for your support.
/s/ Anne Sheehan
/s/ Ralph Whitworth
Anne E. Sheehan
Ralph V. Whitworth
Director of Corporate Governance
California State Teachers' Retirement
Relational Investors LLC
P.S. You may receive a call directly from Timken's proxy solicitor asking you to vote your proxy over the telephone. If you get this call, please send the message to Timken that you want to enhance the value of your Timken investment by voting FOR Item No. 6 and ask Timken to send you a confirmation of your vote FOR Item No. 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 today number 862,000 from the state's 1,600 school districts, county offices of education and community college districts.
Photos/Multimedia Gallery Available:http://www.businesswire.com/multimedia/home/20130410006228/en/
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 Separation of Bearings and Steel Businesses is Sound Strategy to Unlock Shareholder Value at the Timken Company originally appeared on Fool.com.
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