Relational Investors, a value oriented investment management firm headed by Ralph Whitworth and David Batchelder, is pushing The Timken Company (NYSE:TKR) to spin-off its business into two separate publicly traded companies after acquiring a 5.73 percent stake in the company. The firm is known for its activism in smaller companies, but TKR is slightly different with a market cap of over $4 billion.
Based on the 13D filing of Relational Investors with the Securities and Exchange Commission (SEC), the company purchased 2,667,027 shares in the century-old bearings and transmission parts manufacturer at a price range of $39.50 to $41.27 per share. The total stockholdings of the hedge are approximately 5.5 million shares as of November 28, 2012.
According to Relational Investors, the shares of The Timken Company (NYSE:TKR) are currently undervalued by the market because its steel business and bearings businesses are incongruent with each other. The hedge fund met with the management team and board members of the Timken last August, and pushed its agenda to spin-off its businesses into two publicly traded companies.
Relational Investors argued that the break-up would increase the stock value of the company, and shareholders’ value. However, the hedge fund cited that the management of the The Timken Company (NYSE:TKR), which is headed by Ward J. Timken Jr., a family member of the founder of the company, did not show any interest, nor take steps to evaluate its proposal.
The hedge fund noted that bearings and transmission parts manufacturer still believes that the discount price of stock would climb by improving returns and decreasing the volatility of its steel business. Relational Investors believe that the stock value of Timken Company would continue to trade at a discount price despite earnings improvement, as the company’s businesses have opposite financial and operational characteristics.
In addition, Relational Investors said it supports the recommendation of the California State Teachers' Retirement System (CalSTRS) that The Timken Company (NYSE:TKR) should hire an investment bank to accomplish a spin-off. CalSTRS owns a 0.41 percent stake in the company. The shareholders of the company will vote on the proposal on their next annual meeting. Furthermore, Relational Investors said it would monitor the performance, business mix, and strategic directions of the company closely.
On the other hand, The Timken Company (NYSE:TKR) responded to the 13D filing of Relational Investors. James W. Griffith, president and CEO of the company, said the board of directors evaluated the proposal of the shareholders and concluded that it is not the right time to break up its businesses.
Griffith said, “As a market leader in high-quality engineered steel products, our Steel Business leverages the same expertise and know-how that we apply across our businesses. We have significant technology, cost, and revenue synergies between our bearing and steel businesses, as well as diversification benefits in continuing to operate under our current structure. These synergies and benefits, coupled with a potential reduction in financial flexibility, among other factors, led the Board to conclude that the separation of the businesses at this time would not be in the best interests of The Timken Company (NYSE:TKR) shareholders.”