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The Suburbanite
  • Timken, investor dispute may continue

  • The dispute between Timken Co. and a group of investors recommending the company spin off its steel business isn’t likely to end after a May 7 proxy vote.

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  • Ralph V. Whitworth knows that Timken Co. ranks among the world’s best when it comes to making and selling steel and bearings.
    That’s why Whitworth has invested millions to buy Timken stock. And he wants to see his investment grow.
    “We want to unlock value there,” Whitworth said. “For all shareholders.”
    In simpler words, Whitworth wants to make some money, for himself and his customers. The investor from San Diego believes Timken can make him money by splitting off its steel business. Investors then will realize the true value of Timken’s bearings business and drive the stock price higher, Whitworth figures.
    “We think of it as liberating these two companies, in a way,” Whitworth said.
    ACTIVIST INVESTOR
    For nearly a year now, Whitworth has urged Timken directors and managers to make the move with the steel business.
    Whitworth’s business, Relational Investors, and the California School Teachers Retirement System, a Relational client, have acquired 7.28 percent of Timken’s stock. Whitworth argues the shares are undervalued by other investors who can’t differentiate Timken from an industrial company making bearings and a materials company making steel.
    As a bearings manufacturer that also makes steel, Timken is considered a conglomerate. Whitworth said investors prefer putting their money with companies focused in one industry instead of with a conglomerate in multiple sectors.
    After the investor group met twice with Timken management and failed to get the resolution they sought, they opted to take the case to shareholders. Now there is a proxy vote recommending that Timken hire investment bankers to review a possible spin off of the steel business. Results of the vote will be announced May 7 at Timken’s annual meeting.
    The proxy became public in November.
    The company and the investor group have been at odds since.
    BETTER FOR ALL
    Whitworth contends the split will do more than help investors. The local community would benefit, he said.
    Canton would become the home of two world class companies with annual sales in the billions of dollars. Timken’s bearings sales are roughly $3 billion and the steel company is $2 billion.
    One of the companies would hire top executives to fill out a new management team.
    Timken management contends spinning off the steel business isn’t a new idea, but something management has pondered several times. Whitworth said company Chairman Ward J. “Tim” Timken Jr. has said the proposal has been reviewed four times over the past decade.
    In each previous review, Timken officials opted against the idea.
    The company, which has stuck with its official statements on the issue, contends steel processing and development goes hand-in-hand with bearing development. Steel and bearings are tightly integrated with shared research and technical expertise.
    Page 2 of 3 - There are supply chain efficiencies that help lower costs, generate faster lead times and improve customer satisfaction, the company contends.
    The investment group counters that splitting the company doesn’t mean the shared technology would have to end. A few agreements would keep the research work going, Whitworth said.
    OTHERS HAVE SOLD
    Through the course of the debate, Whitworth has cited a move by SKF — one of Timken’s biggest competitors in the bearings business — to sell its steel operations. That happened in 2005 when SKF combined its Ovako Steel Division with two other steel makers, Fundia and Imatra Steel. Parts of Ovako had been with SKF since 1916.
    SKF owned 26.5 percent of the joint venture. The move was a chance for SKF to focus on its core businesses and switched the bearing maker’s steel costs from fixed to variable, the company said. Meanwhile SKF was arranging a supply contract with Ovako.
    If SKF can sell its steel operations, why not Timken? “All of the rest of their industry has figured out how to do that,” Whitworth said.
    SKF went back and forth for several years before selling its steel business. The Swedish company first offered to sell Ovako in 1999. After two years of talks but no action, SKF kept the steel business.
    According to a published report, Timken considered buying Ovako but never closed the deal. One reason: Ovako’s heavy dependence on SKF.
    ENTRENCHED
    Whitworth doesn’t see Timken’s directors budging on the proposal.
    It’s a matter of agreeing to disagree, Whitworth said after a meeting with the company earlier this month.
    Company directors and executives are “more and more entrenched in their views,” Whitworth said. That leaves him perplexed. He believes Timken should act now to get as much value as possible. If Timken waits two years before making the move, it’s two years of lost investment, he said.
    The proxy vote doesn’t bring an end to the dispute. Nor does it require that action be taken.
    It’s simply a recommendation, and Whitworth sees no harm in a simple review.
    Going into the annual meeting, Whitworth knows the roughly 20 percent of company stock controlled by the Timken family and pension plans will vote against the proposal. That leaves 80 percent of the shares in play. Relational and CalSTRS will be watching how those shareholders vote.
    Whitworth and his team are confident. They claim that all investors they talked with favor the proposal.
    They also cite the jump in Timken’s share price since late November. The price jumped to $46 per share, from $41, the day the proxy was announced, and since has climbed to the $55 per share range.
    Page 3 of 3 - “I have to think a lot of people think this is a good idea,” Whitworth said.
    NEXT STEP
    Whitworth and CalSTRS don’t plan to walk away after May 7.
    Timken shares have been part of the teachers retirement fund for 18 years, said Philip Larrieu, an investment officer for CalSTRS.
    The pension fund has worked with Whitworth and Relational for several years because his firm works to increase the client’s value. “We like how they make companies better for the long run,” Larrieu said of Relational.
    Whitworth said his firm looks for companies like Timken to make investments. He wants companies that are fundamentally sound, profitable and not over leveraged.
    But the big key is seeing stock that is trading at a discount. Generally the combinations of financial strength and discounted stock price only show up a few times a year, Whitworth said.
    When Relational finds a company with that combination, it starts buying shares and then starts offering advice on how to present its assets to investors, Whitworth said.
    Generally when Relational offers advise, companies listen, he implied. Over the years, Relational has worked with 117 companies, and fewer than a dozen have led to public disputes such as the one being waged with Timken.
    Next year could see Relational and CalSTRS trying to secure seats on Timken’s board.
    Reach Edd at 330-580-8484 or edd.pritchard@cantonrep.com
    On Twitter: @epritchardREP
    Opposing sides
    Timken Co. and the investment group urging a split between the bearings and steel business have separate websites stating their case on the issue.
    Additionally, copies of letters sent to shareholders can be found at both sites.
    Here they are:
    www.timkendrivesvalue.com
    http://unlocktimken.com/