Notice of Exempt Solicitation. Definitive Material. (px14a6g)
15 Aprile 2013 - 12:06PM
Edgar (US Regulatory)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
NOTICE OF EXEMPT SOLICITATION
Name of the Registrant:
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The Timken Company
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Name of the Person(s) relying on the Exemption:
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1. Relational Investors LLC
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2. Relational Investors Mid-Cap Fund I, L.P.
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3. Relational Investors Mid-Cap Fund II, L.P.
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4. Relational Fund Partners, L.P.
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5. Relational Coast Partners, L.P.
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6. Relational Investors IX, L.P.
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7. Relational Investors XV, L.P.
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8. Relational Investors XX, L.P.
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9. Relational Investors XXIII, L.P.
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10. Ralph V. Whitworth
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11. David H Batchelder
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12. California State Teachers Retirement System
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Address of the Person(s) Relying on the Exemption:
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12400 High Bluff Drive
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Suite 600
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San Diego, CA 92130
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100 Waterfront Place
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MS 04
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West Sacramento, CA 95605
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Written Materials:
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Relational and CalSTRS response to Timkens misleading presentation dated April 1, 2013.
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Relational and
CalSTRS Response to Timkens Misleading Analysis Timkens Timkens analysis
is flawed, misguided, and intentionally misleading. This presentation
represents Relational and CalSTRS commentary on Timkens analysis. Selected
slides from Timkens presentation dated April 1, 2013
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1 Timkens
Management Claims to Care About Long-Term Value Creation but Cherry-Picks Two
Arbitrary Periods to Assert Outperformance. Additionally, Timkens management
attempts to take credit for the Companys dramatic stock outperformance since
the announcement of our proposal to separate Steel business. See next slide
for the truth.
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TKRs Stock
Performance During CEOs Tenure Prior to Our Split Proposal 2 Note: 7/29/02
11/27/12, based on TSR with dividends reinvested. Source: Bloomberg During
the CEOs tenure Timken has dramatically underperformed its closest bearings
peer, SKF, and every major specialty steel peer (Carpenter, Nucor, Steel
Dynamics, and Allegheny). (57%) (56%) 37% 38% 40% 92% 162% 173% 207% 239%
280% 355% 357% (100%) (50%) 0% 50% 100% 150% 200% 250% 300% 350% 400% AK
Steel JTEKT US Steel NTN NSK S&P 500 Timken Kennametal Allegheny Steel
Dynamics Nucor SKF Carpenter
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3 Timkens
selection of its peer group is misguided. It is unfortunate that Timken
continues to argue for the use of lower quality peers to justify the
Companys steep trading discount. See next slide for further details.
Japanese commodity bearings peers with 1%-5% margins vs. Timkens 15% margin
Inclusion of these peers does not change conclusion that separation creates
significant upside Commoditized products and blast furnace production High
quality EAF producers, specialized products
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4 Name RI Peer
Group TKR Peer Group Reason Bearings SKF Yes Yes $11B market capitalization
pure-play global highly engineered bearings company. Virtually identical
growth profiles. Very similar margins and return levels. Very similar
products. Altra No Yes $700M market capitalization. Primary business is power
transmission, minimal bearings exposure. Trades at a substantial premium to
TKR (in-line with SKF). Inclusion in peer group does not alleviate TKRs
discount. Kennametal No Yes Industrial tooling company. Trades at a
substantial premium to TKR (in-line with SKF). Inclusion in peer group does
not alleviate TKRs discount. NSK No Yes 48% of revenues from Japan, 61% from
automotive, commoditized products, 2012 EBIT margin of 5%* NTN No Yes 36% of
revenues from Japan, 63% from automotive, commoditized products, 2012 EBIT
margin of 2%* JTEKT No Yes 50% of revenues from Japan, 86% from automotive,
commoditized products, 2012 EBIT margin of 1%* *For comparison, Timkens
Bearings business derives <5% of sales from Japan and 27% from automotive
and generated a 2012 EBIT margin of 15% Steel Carpenter Yes Yes High-quality,
highly-engineered metals pure-play. Steel Dynamics Yes Yes High-quality
electric arc furnace(EAF) producer. Controls nearly 10% of North American
Special Bar Quality (SBQ) capacity. Nucor Yes Yes High-quality EAF producer.
Controls nearly 20% of North American SBQ capacity. Allegheny Yes Yes
Diversified producer of highly value-added metals and alloys. U.S. Steel No
Yes Produces commodity steel using blast furnaces. TKR has publicly stated
that its steel business should not be compared to U.S. Steel (see next
slide). AK Steel No Yes Commoditized products. Predominately blast furnace
production. NSK, NTN, JTEKT, U.S. Steel, and AK Steel are unsuitable peers
for TKR. Although Altra and Kennametal are adequate peers, they are
substantially less similar to TKRs Bearings business than SKF, but their
inclusion does not change the outcome of our analysis. The Peer Group Timken
Uses is Inappropriate Source: Bloomberg, Company filings, and RI assumptions.
115% margin is after allocating corporate expenses to the segments 1
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5 Relationals
analysis assumes that Timken Bearings trades in-line with SKF on EV/EBITDA
multiples. The apparent P/E differential Timken clings to is distorted by: 1)
major differences in capital structure; and 2) our conservative assumption
that the Bearings businesss tax rate remains at 34% after the spin even
though nearly 50% of its business is international. Once those factors are
properly normalized to follow conventional calculation methodology, Timken
Bearings trades in-line with SKF on P/E multiples as well as EV/EBITDA. See
next slide for further support. Timkens P/E multiple before Relational and
CalSTRS public push to separate the businesses was 9.5x. Timken Distorts the
Facts
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6 Timkens CFO
Could Learn Something From Wikipedia Timkens management is unable to grasp
that under-levered companies have higher P/E multiples. The impact is
particularly large in low interest rate environments. Source: Wikipedia,
accessed 4/9/13, http://en.wikipedia.org/wiki/File:Effect_of_leverage_on_PER.png.
Note: reformatted to standard American symbols Timken SKF Illustrative Effect
of leverage on P/E ratio Hypothetical companies with identical operations and
taxation Company A Company B Company C Under-levered Appropriately levered
Over-levered Market Capitalisation $ 200 $ 150 $ 50 A Debt $ 0 $ 50 $ 150
Enterprise Value $ 200 $ 200 $ 200 B Interest Rate n/a 5% 11% Tax Rate 35%
35% 35% EBIT $ 20.0 $ 20.0 $ 20.0 C Interest Expense $ 0.0 ($ 2.5) ($ 16.5)
Earnings Before Tax $ 20.0 $ 17.5 $ 3.5 Taxes ($ 7.0) ($ 6.1) ($ 1.2) Net
Income $ 13.0 $ 11.4 $ 2.3 D P/E Multiple 15.4x 13.2x 22.0x A/D EV/EBIT
Multiple 10.0x 10.0x 10.0x B/C
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7 Timken
Switches Metrics on the Same Page Timken pulls a switcharoo to trick investors
into believing its story that Timken Steel will be too small to trade
independently. Note that the chart is deceptively based on enterprise value
and Timkens arguments are based on market cap. See the next slide for a fair
comparison. All of these points are false.
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8 Timken
Steels Market Cap. Will Have Critical Mass Timken Steels high-quality
assets and its unique positioning as the only pure-play SBQ steel company in
North America will make the Company highly attractive to investors. On the
previous slide, Timken takes advantage of the Companys inefficient capital
structure to show that Timken Steel will have a lower enterprise value than
peers. When compared on market capitalization Timken Steel is not an outlier.
Timkens 2012 Steel margins are at the top of its peer group, reflective of
its strong competitive position and unique specialty exposure. We believe
Timken Steel is capable of maintaining an investment grade credit rating with
substantial liquidity and financial flexibility. Best-in-Class Margin TKR
Steel Market Cap Comparable vs. Peers Qualitative Factors Will be Offsetting
$13,682 $3,196 $3,190 $2,516 $2,389 $1,291 $413 5.8% 5.5% 6.4% 2.0% 9.7%
13.0% (1.5%) (2%) -- 2% 4% 6% 8% 10% 12% 14% $ -- $2,000 $4,000 $6,000 $8,000
$10,000 $12,000 $14,000 $16,000 NUE STLD ATI X CRS TKR Steel AKS 2012 EBIT
Margin Market Cap. ($ Millions) Market Cap. vs. EBIT Margin
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9 Even using
Timkens dis-synergy estimates, the PV of those costs is only $2.65 per share
higher than the estimates used in Relationals analysis. That cost is
insignificant compared to the $15 gain already priced into the shares based
on anticipated separation and the additional $15 per share available to
shareholders from the split. Supply chain benefits can easily be maintained
through customary business relationships. Timken cant even describe this $10
million of annual lost synergies. $21 - $28 million All of these benefits
can be maintained after separation through customary business relationships.
Value pricing benefits can easily be maintained through customary business
relationships. When adjusted, Timkens dis-synergy estimate of $21-28 million
per year is in line with Relationals previous assumption of $25 million. 1 1
1 Calculated as the $60-80M range given by Timken multiplied by the 35% of
Timkens estimates that Relational believes to be credible. Timken attributes
no credit to customary mitigation methods.
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10 30% 28% (3rd
Party) Timken intentionally misleads its shareholders by including steel that
is sold to third-parties and makes its way back into Timken products. These
sales are already made to a third-party so it is not possible for them to be
affected by a separation of Timkens Steel and Bearings businesses. Timken
continues its attempt to deceive shareholders by employing underhanded
calculations to show that sales between the businesses are double the actual
number! 30% Does not reduce volatility of Steel business Negligible, if Any
Already significant supply of high quality steel in U.S. Since SKF divested
its steel business it has not had any shortages of supply No competitive
advantage given SKF purchases Timken Steel and SKFs bearings margins are
similar to TKR Does not exclude 3rd party sources Direct 1Source: stated by
Timken management in our meeting on 4/2/13 1
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11 The average
of SOTP forecasts published in 2013 is $66. Timken dramatically overstates
the costs of separating the businesses by refusing to acknowledge that most
of the current benefits of cooperation can be maintained after a separation
through customary business arrangements. $66 OUTDATED Timken intentionally
uses outdated analyst estimates to artificially reduce its trading discount.
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12 8 - But 9 of
12 are from Ohio and 5 of 12 current directors have had more than 40% of
non-affiliated votes withheld in the last 5 years, including 3 with more than
50% withheld. - But only under duress after refusing to implement a
shareholder proposal receiving the necessary majority vote and having all
Board nominees subsequently receive substantial withhold votes. - The Board
considers a Timken family member to be independent and allows him to sit on
the audit committee. The Timken Company has paid the founders great-great
grandson, Tim Timken, $37M since 2005 and $17M over the last two years as
Executive Chairman. Non-affiliated shares defined as all shares not held by
the Timken Family, the Timken Foundation, or the Timken Savings Plan Weak
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13 CalSTRS proposal and Relational ownership
stake are publicly disclosed on Schedule 13D 13D amended to reflect increased
Relational ownership Relational and CalSTRS send joint letter to Board
members Significant Upside from Potential Separation Already Imbedded in
Stock Price We attribute Timkens significant outperformance since the public
announcement of our proposal to shareholder anticipation of a separation of
the businesses. 32% Relative Outperformance vs. Peers Source: Bloomberg.
Chart is reproduced from previous filing and data is as of 2/26/13 (20%)
(10%) - 10% 20% 30% 40% 2/26/2013 2/19/2013 2/11/2013 2/04/2013 1/28/2013
1/18/2013 1/11/2013 1/04/2013 12/27/2012 12/19/2012 12/12/2012 12/05/2012
11/28/2012 11/20/2012 Indexed Performance Relative to S&P Midcap 400
Steel Peers TKR SKF
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14 See Appendix
for Assumptions; Source: Bloomberg, Company filings, and RI Assumptions. 2013
TKR segment revenue and EBITDA are based on available analyst estimates and
RI projections and aggregate to total Company consensus estimates.
Incremental Corporate post Spin is pro-forma for full year expense. Pension
Addback = (Expected Pension Expense Service Cost). All numbers, except per
share, are in $Millions. The valuation discount continues to be significant
when compared to soft synergies of joint research and sales. 1 Additional 29%
Upside Remains from Separation 1 Peer multiples are pension adjusted. Steel
multiple is based on Steel Dynamics, Nucor, Carpenter, and Allegheny.
Bearings multiple is based on SKF. Slide is reproduced from prior filing and
is not updated EV/EBITDA Valuation 2013 Pension 2013 EBITDA Peer Enterprise
Equity Val. EBITDA Addback Ex. Pension Multiple Value Per Share Bearings $647
$52 $700 8.5x $5,946 $54.78 Steel $189 $13 $202 7.3x $1,474 $13.58 Total $837
$65 $902 8.2x $7,420 $68.36 Enterprise Value $7,420 Net Debt ($107) Pension
Liability $398 Other Post-retirement $372 Transaction Fees $200 Equity Value
$6,558 Steel Share Count 95.9 Value per Share $68.36 Current Price $53.12
Upside 29% 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E Bearings Revenue
$3,648 $3,119 $3,350 $2,471 $2,802 $3,338 $3,367 $3,276 Bearings EBITDA w/
Allocated Corporate $279 $313 $421 $337 $480 $631 $637 $664 Incremental
Corporate post Spin ($17) Post-Spin EBITDA $279 $313 $421 $337 $480 $631 $637
$647 Steel Revenue $1,472 $1,562 $1,852 $715 $1,360 $1,957 $1,754 $1,578
Steel EBITDA w/ Allocated Corporate $248 $255 $288 ($23) $171 $289 $268 $197
Incremental Corporate post Spin ($8) Post-Spin EBITDA $248 $255 $288 ($23)
$171 $289 $268 $189
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26% potential
downside ($14 per share) if Proposal does not pass and discount returns to
original level Allows Management to dismiss separation longer term Vote FOR =
$68 per share Vote AGAINST = $39 per share Timken Current Price = $53 per
share $14 of share price out-performance since CalSTRS and Relational
announced Proposal Significant investor and analyst support of Proposal 28%
Potential upside ($15 increase) to a $68 share price if split occurs Provides
an option for Management to seriously evaluate separation For 15 Shareholder
Decision Tree Against Proposal: Item No. #6
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Relational supports the shareholder proposal
submitted to Timken for the Annual Meeting by the California State Teachers
Retirement System (CalSTRS), which recommends that the board of directors
and management act expeditiously to engage an investment banking firm to
effectuate a spin-off of Timkens steel business into a separately traded
public company. We urge you to vote FOR the CalSTRS proposal, which we expect
to be presented in Timkens proxy materials. However, neither Relational nor
CalSTRS are soliciting proxies for the CalSTRS proposal; please DO NOT send
us your proxy card. Return your proxy card to the proxy-voting agent using
the envelope that was or will be provided to you by Timken. 16 Disclaimer
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