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Timken to split bearings, steel operations into separate companies

By Jim Mackinnon
Beacon Journal business writer

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The Timken Co.’s board of directors met Thursday morning for perhaps the most critical vote in the Stark County company’s 114-year-old history.

Just after 4 p.m., the outcome went public: Timken will be split into two companies, one a bearings manufacturer and the other making steel.

“We had a strong consensus. Nobody voted against,” said James W. Griffith, president and chief executive officer.

The board concluded this is the right time to divide Timken into “two world-class companies” to deliver shareholder value, he said.

The vote to create what will become in about 12 months a $1.7 billion steel company and a $3.4 billion bearings and power transmission business acknowledged a process that started in May with strong pressure from Timken’s largest shareholder, California-based Relational Investors LLC.

The bearings-related company will retain the name “The Timken Company.” The steel company is not yet named but likely will also have “Timken” as part of it.

Most importantly for the Canton community, both companies will remain in Stark County.

Timken’s board and top executives initially strongly fought Relational Investors and its partner, the $170 billion California State Teachers’ Retirement System, or CalSTRS, which publicly started pushing for a steel business spinoff last November. Relational and CalSTRS succeeded in passing a nonbinding shareholder resolution at May’s annual meeting calling for ­Timken to split itself in two.

What changed the board’s mind was a “listening tour” it undertook to meet with company shareholders after losing the vote in May, said Ward J. “Tim” Timken, the 46-year-old company chairman. He will become chief executive of the new steel company. He started at Timken in 1992 and was named steel business president in 2004 and board chairman in 2005.

Following the May vote, the company board created a special strategy committee to explore spinning off the steel business. The timetable was to reach a decision by Sept. 30.

“I think the message we got was the turning point for us,” Timken said. Board meeting conversations started to turn from whether to do a spinoff to discussions on how to do it and create two independent entities, he said.

And then the deciding vote was Thursday.

Timken acknowledged that the process was not always an easy one for him and other family members whose roots go back to the company’s founding 114 years ago.

But Timken said there was solace in that the board of directors undertook a fact-based process in arriving at its decision.

“I became convinced as a family member,” he said. His father, a current board member and former CEO and chairman, also agreed with the decision, he said.

“It is the right decision and the right time,” Griffith said. Timken’s board and top executives had looked at spinning off the steel division a number of times going back years, he said. The board previously decided that the best way — until now — to enhance shareholder value was to keep the company intact while making other fundamental changes, he said.

“Nobody forced the decision,” Griffith said. “The board of directors looked at the facts.”

The shareholders own the company and the board works for the shareholders, Griffith said. “We listen. There’s a dialogue.”

Griffith will retire from Timken once the spinoff is complete.

Griffith said he agrees with the decision to split the company. Griffith, 59, has been CEO for 14 years and had told the board when he was promoted to chief executive he likely would retire at age 62.

With the launch of what will be two new businesses, it makes sense to have a top executive in place who will be there for the long haul and not just a couple of years, Griffith said.

The spinoff is expected to cost about $125 million, the company said.

Shares of Timken rose $1.79 to $60.26 on Thursday. Shares are up 27.5 percent, including dividends, since Jan. 1 and are up 59 percent from a year ago.

CalSTRS and Relational Investors released a joint statement in which they commended Timken’s plan. Relational owns about 7.9 percent of Timken’s outstanding shares.

“We fully support and commend Timken’s decision announced today because it means they’ve listened to their shareholders,” said Anne Sheehan, CalSTRS director of corporate governance. “In particular, we are grateful to the special strategy committee for its diligent work and to the entire Timken board for responding to the will and long-term interests that Timken’s shareholders expressed at the annual meeting. We firmly believe this action will create long-term benefit for the shareholders.”

Relational co-founder Ralph Whitworth said in a news release, “The plan announced today ensures the long-term vitality and competitiveness of Timken as two separate companies, both of which will lead their respective industry segments for operating excellence. It’s the right answer for all constituents, including the city of Canton, which will now be the home of two world-class companies.”

Griffith will be succeeded as CEO and president of the Timken Co. by Richard G. Kyle, 47. Kyle joined Timken in 2007 and is a group president and chief operating officer of Timken’s bearings and power transmission business.

John M. Timken Jr., 62, will become nonexecutive chairman of the Timken Co. once the spinoff is complete. He has been a board member since 1986.

The company said the new publicly traded $1.7 billion steel company will be headquartered in Canton and “is expected to have strong prospects for growth and margin improvement.”

The steel company, which makes high-quality steel for industrial markets including Timken’s bearings business, will have about 3,000 employees, seven factories, four warehouses and five sales offices. It will have its own board of directors.

The soon-to-be separate Timken Co. will have about 17,000 employees and 35 factories plus other facilities.

Both companies will be fully capitalized, with strong balance sheets and respective pension funds that will be “substantially fully funded,” according to a statement. The spinoff does not need further shareholder approval but does need regulatory approval, according to a company statement.

Timken’s recent investments include putting in more than $250 million to expand the capabilities of its Faircrest steel mill outside Canton.

The spinoff is expected to be tax-free to Timken shareholders, the company said.

A lot of spinoff details remain to be worked out, Griffith and Timken said.

Decisions to be made include where separate corporate headquarters will be in Stark County, they said. The Timken Co. has two major office sites in the county, they said.

In any case, the two businesses will have a close working relationship, Timken said.

“We’ll effectively have two Timken companies in Stark County,” Timken said. “We are still here. ... The core values of the Timken Co. will remain the core values of the Timken companies. We’re here to stay.”

Jim Mackinnon can be reached at 330-996-3544 or jmackinnon@thebeaconjournal.com


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