Timken Co the bearings maker that trades at the lowest earnings multiple among its peers, is costing shareholders the chance to recoup USD 1.3 billion in market value lost this year by not spinning off its steel unit.
Ralph Whitworth's Relational Investors LLC, known for pushing for changes and board seats at companies from Hewlet Packard Co to Illinois Tool Works Inc announced a 5.7% stake last week and said Timken's value would jump to USD 64.98 a share by separating the bearings and steel units.
While Timken last week rejected a breakup and said keeping the units combined provides technology and profit benefits, BB&T Corp said it's "uncontroversial" that the company is worth more in pieces after past attempts to eliminate the discount from the steel business have failed. The USD 4.3 billion company would be valued 33% more if split, according to the average of four analysts' estimates compiled by Bloomberg. Timken's price earnings ratio of 8.6 is cheaper than every global competitor, with its valuation about 45 percent less than the median, the data show.
Mr Samuel Eisner, a New York based analyst with William Blair & Co said that "Timken doesn't get a proper valuation adding that a breakup may not be imminent because of the relatively high ownership among members of the founding family and the company pension. "If you did have a chance to spin it off, you might be able to revalue that business at a higher multiple."
The company, founded in 1899 by Henry Timken, produces anti friction bearings and power-transmission components, in addition to running the business Relational wants jettisoned, which produces alloy steel used in vehicle chassis and engines as well as steel forging bars and seamless tubes for oil and gas drill bits. The company runs 58 manufacturing facilities and has operations in 30 countries and territories, according to Timken's annual report from February.
Timken Chief Executive Officer Mr James Griffith said in a November 28 statement that "We have significant technology, cost and revenue synergies between our bearing and steel businesses as well as diversification benefits in continuing to operate under our current structure. These synergies and benefits, coupled with a potential reduction in financial flexibility, among other factors, led the board to conclude that the separation of the businesses at this time would not be in the best interests of Timken shareholders."
