Relational and CalSTRS Assert That Timken’s Shareholder Presentation is Flawed and Misleading
01 Aprile 2013 - 10:29PM
Business Wire
Relational Investors LLC ("Relational") and the California State
Teachers' Retirement System ("CalSTRS"), collectively owners of
7.28% of the shares of The Timken Company, (NYSE: TKR) (“Timken” or
“the Company”), today stated that an investor presentation filed
this morning by Timken presents a highly flawed and misleading
analysis with respect to the CalSTRS proposal to spin off Timken’s
Steel business to unlock shareholder value. The spinoff would
create two publicly traded Timken entities – Steel and Bearings –
ending the conglomerate discount which has consistently impaired
the company’s stock price. Relational, Timken’s largest
independent, public shareholder, fully supports the CalSTRS
proposal, which is before shareholders for the Company’s annual
meeting on May 7, 2013.
Ralph Whitworth, founder and principal of Relational, stated,
“It is shocking that Timken would underestimate its shareholder’s
intelligence by using such erroneous analysis as justification to
not unlock value for Timken shareholders. In our numerous
conversations with many of Timken’s largest shareholders, there is
a consensus view that the Company should spinoff the Steel
business.”
The facts are straightforward and Timken, try as it might, can’t
hide or justify these realities:
- Since November 15, 2012, shortly before
Relational and CalSTRS filed their Schedule 13D advocating for the
separation of Timken's Steel and Bearings businesses, Timken's
stock price has outperformed its peers by 41%, or over $15 per
share.
- Timken's Board must know that if it
maintains the Company’s conglomerate structure rather than separate
its businesses as recommended in the CalSTRS shareholder proposal,
there is a significant risk that the price of Timken’s shares will
fall precipitously.
- Timken’s synergies analysis is highly
flawed and contrived. It does not reflect the clear opportunity to
mitigate dis-synergies as SKF did following the separation of its
businesses and, which we cited in our Timken shareholder
presentation. Indeed the mid point of Timken’s projected
dis-synergies of $6-8 per share is no more than $2.65 per share
higher than what we projected in our conservative analysis. And, as
Timken knows or should know, there is ample opportunity to mitigate
this incremental dis-synergy through supply arrangements.
Furthermore:
- Timken intentionally uses many analyst
sum-of-the-parts valuations from November and December of last
year, which are out-of-date. The three valuations from 2013 that
Timken includes average $66, an 18% increase from the current stock
price.
- Timken uses its three year share price
performance to justify its conglomerate business strategy. But this
performance includes the stock’s outperformance of its peers since
the November 28th joint 13D filing by Relational and CalSTRS.
- Timken accuses Relational of applying
an 18x P/E ratio to its Bearings business versus 14x for peers.
However, Timken chooses to ignore the impact of its poor capital
structure. If Timken used $1 billion in new debt to buy back its
stock – thereby approaching typical peer leverage ratios – the
Bearings company's P/E ratio would decline to 16x. We are confident
that the Bearings business would trade at premium to peers based on
the Company’s own growth forecasts that are much higher than
peers.
- Timken is clearly wrong about peer
group analysis. A broadened peer group analysis does not change our
conclusion that separation will result in enhanced shareholder
value at Timken. Timken should know that broadening the peer group
too much to include, for example, Japanese companies is
inappropriate because their margins, geography, and products are
not necessarily comparable.
- Timken claims that
if its businesses were separated, Steel would not
have an investment grade credit rating. How does Timken know
this? For example, ITT maintained an investment grade credit
rating when it was spun out at a $1.7 billion market
cap. And, in any case, as Timken knows or should know,
it is more important for Timken to minimize its cost of
capital rather than maximize its credit rating at the expense of a
sub-optimal capital structure.
“In addition, we note that in a Reuters article following
Timken’s press release, Timken says that CalSTRS and Relational do
not include transaction costs of $200 million in their analysis.
This also is incorrect –the analysis in our shareholder
presentation includes these transaction costs.
“Finally, it is not in shareholders’ best interests for Timken
to be trying to muddy the waters. We are confident that
shareholders understand the facts and will VOTE FOR CalSTRS
proposal to unlock value for all shareholders through the
separation of Timken’s Steel and Bearings businesses. Based on a
consensus of security analyst views, the ongoing impaired nature of
Timken’s stock price, and expressions of support we are hearing
from shareholders, our shareholder proposal is timely. We urge all
shareholders to unlock shareholder value by VOTING FOR the CalSTRS
shareholder proposal,” Mr. Whitworth said.
To learn more about the CalSTRS proposal and how to unlock
significant shareholder value at Timken by allowing the market to
independently value Timken’s Bearings and Steel businesses as pure
plays in their respective industries please visit
www.UnlockTimken.com.
Shareholders are urged to VOTE FOR PROPOSAL #6. If you have
questions about how to vote your shares, please contact our
information agent, Okapi Partners at (877) 285-5990.
About Relational Investors LLC:
Relational Investors LLC, founded in 1996, is a privately held,
multi-billion dollar asset management firm and registered
investment adviser. Relational invests in publicly traded companies
that it believes are undervalued in the marketplace. The firm seeks
to engage the management, board of directors, and shareholders of
its portfolio companies in a productive dialogue designed to build
a consensus for positive change to improve shareholder value.
About the California State Teachers Retirement System:
The California State Teachers’ Retirement System, with a portfolio
valued at $161.5 billion as of February 28, 2013, is the largest
educator-only pension fund in the world. CalSTRS administers a
hybrid retirement system, consisting of traditional defined
benefit, cash balance and voluntary defined contribution plans, as
well as disability and survivor benefits. For 100 years, CalSTRS
has served California's public school educators and their families,
who now number 862,000 from the state’s 1,600 school districts,
county offices of education and community college districts.
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