Two California-based investment groups that want to force historic changes on one of the Canton area’s oldest and largest corporations control billions of dollars worldwide and have a history of working together.
Investment firm Relational Investors LLC and the $161 billion California State Teachers’ Retirement System pension fund both own stock in 114-year-old bearings and steel maker Timken Co.
They are strongly arguing that they would prefer owning stock in two Timkens — one that makes bearings and the other steel.
CalSTRS, which calls itself the world’s largest educator-only pension fund, has owned shares of Timken for at least 15 years, one of its senior investment advisers said. The total amount isn’t large — about 0.38 percent of outstanding Timken shares — which is the fund’s typical stake for an individual company holding. Relational, by contrast, owns 6.9 percent of Timken, making it the company’s single largest shareholder.
Last November, CalSTRS and Relational announced they would prefer Timken split the current corporation into one that focuses on the bearings business and another that makes steel. Dividing the company will “unlock” value in the now-combined business and should drive up the stock prices in what would be two publicly traded corporations, they argue.
The stock price immediately responded to the proposal, jumping 40 percent since then.
Not satisfied, the investment team has stepped up pressure on Timken in filings with the Securities and Exchange Commission. One of the filings is an appeal to shareholders, laying out the reasons for the split and suggesting that Timken is poorly managed.
All this adds up to being a huge deal for the century-old company, which employs about 4,000 people in Stark County and about 20,000 globally. The company earned $495.5 million on revenue of nearly $5 billion in 2012. Timken’s nearly $5.2 billion in revenue in 2011 ranked it the nation’s 470th largest corporation on the 2012 Fortune 500 list.
Not going away
Timken management likely would just as soon see the whole issue fade away. The company has issued statements opposing Relational’s and CalSTRS’ efforts and a presentation at an industry investment conference March 5 argued that shareholders are best served by a unified company.
The company has responded only officially, previously saying that it explored on its own whether to separate the two businesses but feels the current structure works best.
One thing in management’s favor is that Timken insiders, including the Timken Foundation, Timken family members and senior executives, own or control about 15 percent of the company’s shares, by some accounts.
The issue will remain under discussion at least through May 7, the date of Timken’s annual shareholders meeting and where Relational and CalSTRS will put to a nonbinding vote their proposal to split the company in two.
Two top executives at Relational and CalSTRS explained their reasoning.
“We’re holding an asset that doesn’t reflect the full value of the company,” said Philip Larrieu, investment officer at CalSTRS.
“We are invested in the company because we believe there is a significant value discount,” said David Batchelder, co-founder and principal at Relational. “We told Timken, this is a divorce made in heaven.”
That’s in large part because the Timken name would stay with both businesses; the companies would stay in Canton; employment should increase; and stock prices should rise, Batchelder said. “We made it clear to the Timken family that we don’t see significant social impacts.”
Investors have plan
The two companies can share the same corporate headquarters building, do joint research and do other things together on a contractual basis, he said.
Timken’s conglomerate model — one umbrella corporation holding disparate businesses — isn’t as valuable as two “pure play” companies, one that focuses on steel and the other on bearings, Larrieu said.
“We can better diversify [pension fund holdings] if we are pure play,” he said.
Under Timken’s current, unified corporate structure, the Timken board determines the appropriate business balance between bearings and steel, he said. If there were two separate companies, CalSTRS’ trading desk determines the appropriate stock mix it wants to hold in the bearings and steel companies, he said.
Relational and CalSTRS are not trying to shut down a division of Timken, he said.
The two say that splitting Timken in two should have little, if any, social impact in Canton and could result in additional jobs. There also would be no name changes — one business would be called Timken Steel, the other Timken Bearings, Larrieu said.
“There’s no reason to rebrand,” he said.
Relational and CalSTRS used Timken’s March 13 announcement that it bought U.K.-based Interlube Systems Ltd. to repeat their calls to split the company.
“If the Interlube acquisition complements the bearings business as Timken asserts, then shareholders should be allowed to realize the full value of the bearings business,” the two said in a joint statement.
Timken issued a statement in rebuttal.
“The acquisition of Interlube Systems Ltd. announced this week is consistent with our strategy which has delivered superior returns for our shareholders,” Timken said. “Timken has a track record of delivering strong financial performance and is committed to acting in the best interests of shareholders. We continue to strongly disagree with Relational and CalSTRS that substantial value can be created for Timken shareholders by separating the steel and bearing businesses at this time.
“As noted previously, the board and management have carefully evaluated a separation with input from outside advisors. We have concluded that Timken has significant cost, technology and revenue synergies between its bearing and steel businesses, as well as diversification benefits in continuing to operate under its current structure. The loss of these benefits, as well as a potential reduction in financial flexibility, would more than offset any near-term valuation increase that might result from a separation of the businesses.”
When CalSTRS and Relational went public with their proposal, Timken shares traded at $41.41. Since then, shares have increased by nearly 40 percent.
Analyst is skeptical
“We think a lot of the benefits [of a split] have occurred” with the subsequent increase in Timken share prices, said industry analyst Eli Lustgarten with Longbow Research in Independence. He said he is skeptical about breaking Timken into two.
“I’m not sure it is the smartest thing to do,” he said. “It is a unique business. ... I’m not sure it makes the best strategic sense.”
The rise in Timken shares shows the market thinks a split Timken makes sense, said Larrieu at CalSTRS. “I think the market is betting it really is a possibility,” he said.
Relational and CalSTRS will continue to talk other Timken shareholders into backing their upcoming resolution in early May.
“We work with companies to unlock value,” Batchelder said. “We take a position in a company to unlock value. We don’t buy [entire] companies. We don’t take control of other companies. We need to persuade.”
They typically begin working behind the scenes with corporate executives and corporate boards, he said. If the executives and boards fail to make the changes Relational feels are needed, the next step involves going public, he said.
Batchelder said Relational invests in companies such as Timken on behalf of pension funds all over the world.
“We’re investing on behalf of people,” he said.
Larrieu at CalSTRS said the goals of the California pension fund and those of Relational “sort of meshed” over their respective Timken holdings.
“We’ve worked with Relational on lots of projects,” he said. “We talked about [Timken] and saw that our agendas aligned.”
To find the SEC filings for Timken and the investment group here are the websites.
Investors’ case for Timken split
Jim Mackinnon can be reached at 330-996-3544 or email@example.com.