THE WALL STREET
November 28, 2012,
2:00 p.m. ET
Takes Stake in Timken, to Argue For Breakup
JOANN S. LUBLIN
Activist fund Relational
Investors LLC has amassed more than 6% of
Timken Co. and wants to split the century-old maker of bearings
and transmission parts into two publicly held companies, a person
familiar with the matter said.
Relational is expected to
divulge its stake and proposal to break up the Canton, Ohio, company
in a regulatory filing Wednesday. The fund began accumulating the
Timken holding last spring, this person said.
The move sets up a public
standoff between an activist investor known to push for board seats
and a family company with deep roots in Ohio. Representatives from
Relational have met with Timken's executives and board members to
argue that a breakup would lead to a higher share price, but the
company didn't indicate it would move forward with the idea, the
person said. Timken didn't immediately respond to requests for
Timken's shares are up
nearly 7% so far this year but have lost a quarter of their value
since late April, when they were spurred higher by a strong
first-quarter earnings report. The company had seen a strong run of
profits thanks to higher prices, lower costs and acquisitions. But
more recently, weak demand outside North America has weighed on sales.
Last month, the company
lowered its forecast for revenue and earnings this year after
reporting its third-quarter profit fell 27% amid a
deeper-than-expected drop in sales.
Relational wants Timken to
spin off its specialty steel business, which the fund believes is
hurting the value of the company's shares, according to documents that
are expected to be filed Wednesday. That would leave a company focused
on the remaining bearings business, which accounted for about
two-thirds of Timken's revenue in the first nine months of the year.
As part of the regulatory
filing, Relational is expected to say it supports a shareholder
resolution calling on the board to hire investment bankers to carry
out a spinoff. The resolution has been submitted by the California
State Teachers' Retirement System, a big public pension fund. If
accepted by the company, shareholders would vote on the resolution at
Timken's 2013 annual meeting.
"We're long term
shareholders and want to be sure that the company is optimally
configured to maximize value," said Anne Sheehan, the pension fund's
director of corporate governance.
The expected regulatory
filing also is expected to say Relational may seek seats on the
company's board, the person familiar with the matter said.
Timken is one of several
Midwestern companies to have built up a niche in making specific kinds
of steel alloys for individual customers, ranging from car companies
in Detroit to gas drillers in western Pennsylvania. Its expertise is
just as much in chemistry as steelmaking. At a lab in its plant near
Canton, Ohio, a large table of chemical elements hangs on the wall to
help engineers cook up their specially designed recipes.
But analysts say there are
concerns it may have overextended recently with projects such as a
$225 million expansion kicked off this spring at its Canton-area
plant. Much of that new production will be steel geared toward the
drills, pipes and tubes needed for gas and oil drilling, a segment
that analysts say risks oversupply as steelmakers across the U.S. ramp
up capacity to cash in on the U.S. energy boom. Slumping gas prices
have also hurt demand for energy-related steel goods.
Relational often argues
that companies should be sold or broken up. It has also pushed for
less dramatic changes, like cuts to what it sees as excessive
executive compensation. It has influenced decisions at companies even
when it holds a small stake. Last year, for instance,
Hewlett-Packard Co. gave Relational co-founder Ralph Whitworth a
board seat even though Relational only held about 1% of the technology
giant. Timken had nearly 21,000 employees at the end of 2011.
—John W. Miller
contributed to this article.
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