Stock Spinoffs

Relational Investors Whitworth Tells Timken To Spin Off Steel Business- TImken Steels Itself Against Demands

Nobody is safe these days from activist investors, not even 100+ year old family businesses. Relational Investors,  who successfully pushed for a spinoff at L-3 Communications (LLL), has set its sights on a new target, specialty steel and bearings maker Timken Co. (TKR). The investment firm, headed by Ralph Whitworth, announced in a recent 13D filing that it had accumulated an ~6% stake in the company and, along with CalSTRS, was urging the company to spin off its specialty steel division into a standalone company.

According to a 2011 10K, the steel division accounted for 37% of total revenues (~$1.9b) and 34% of operating income. The case for the spin is that the company, as currently structured,  is undervalued due to the fact that the steel business is really a volatile materials company and the bearings business is a more stable industrials company:

These two industry sectors have divergent operating and financial characteristics and are generally followed and evaluated by different industry analysts.  At any given time investors value these two industry segments separately within a broad range depending on many market, economic and firm-specific factors.

That may be, but perhaps there are some synergies between the units? Pish tosh, as given the expected sum of the parts valuation of ~$65/share (compared to the current price of $47), any ‘soft’ synergies are ‘negligible when compared to the market discount.’ Several analysts in this Bloomberg piece seem to agree that the company is currently undervalued.

Shortly after receiving the 13D, the company responded with its own statement and in no big surprise, it doesn’t agree with Mr. Whitworth’s analysis. In the letter, company CEO James Griffith argues that in addition to the diversification benefits of operating two distinct businesses, there are also strong ‘technology, cost and revenue’ synergies between the units. As such, the board decided that a separation was not in the best interest of Timken shareholders.

This could get interesting. The market clearly likes the idea of a spinoff as Timken popped upon the 13D announcement. CalSTRS, despite its meager ~0.25% stake, is pushing for a shareholder vote on a proposal pushing the company to hire an investment bank to ‘effectuate’ the spinoff of the steel division. The company insiders and related foundations appear to control at least ~14% of the stock though so this could escalate into a messy public battle. We will keep you updated.

Disclosure: Author holds no position in any stock mentioned.

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