Star Trek fans will no doubt recognize the famed motto of those nasty, robotic, intergalactic conquerors hell-bent on assimilation. What they won’t know is that the phrase is also rumored to be frequently muttered at company board meetings after Ralph Whitworth’s Relational Investors announces a stake. The activist firm has been quite a boon to this site having successfully pushed for spinoffs at ITT (ITT), L-3 Communications (LLL) and most recently, Timken (TKR).
When the firm first approached Timken about spinning off its steel business last year, the family run company didn’t get the memo and opted to fight back. Management chose…poorly. Despite sending letters to shareholders, creating the website ‘TimkenDrivesValue.com’, touting synergies in fancy presentations and sending even more letters to shareholders, the company lost the shareholder vote on a non-binding proposal calling for a spinoff. Although close, the loss was even more profound considering the fact that company insiders (and related parties) control a sizable number of shares. Shortly thereafter the company hired Goldman Sachs (GS) to evaluate the separation of its steel business and just a few months later the spinoff was formally announced.
The spinoff will create a new engineered steel company with ~$1.7b revenue company to be called TimkenSteel (very creative choice). The ~$3.4b parent will retain the ‘just’ Timken name and focus on its bearings and transmission business. The engineered steel business is North America’s leading manufacturer of SBQ large bars and a large producer of seamless mechanical tubing. It will remain headquartered in Ohio and includes approximately ‘3,000 associates, seven manufacturing plants, four warehouses and five sales offices.’ Timken will have a broad product portfolio including bearings and related mechanical power transmission components and services. The company will employ ‘nearly 17,000 associates…have 35 manufacturing plants, 25 service and repair facilities, four technology centers, and an extensive network of sales offices and warehouses around the globe.’ Leadership was quick to tout the benefits of the spinoff, with then CEO Jim Griffith noting ‘that the two stand-alone companies will continue to advance their distinct growth strategies within their respective core markets, which is expected to further improve competitiveness.’ The head of the strategy committee, independent director Joseph Ralston, was also pitching the benefits stating that ‘it became clear that creating two focused companies would allow investors to more fully appreciate and value the unique strategic and financial strengths of each business, including operating performance, margins, earnings and cash flow.’ In a nod to management’s original synergy claims, the company ‘will work to maintain them through a mutually beneficial business relationship between the two independent companies.’
The spinoff will usher in an era of new leadership at the company as Timken’s longtime CEO Jim Griffith will retire after the spinoff is completed. He will be replaced by current COO Richard Kyle and John Timken will become non-executive chairman of the company. TimkenSteel will be headed by a different Timken, Ward ‘Tim’ Timken, who will become CEO, President and Chairman after the separation. He will also remain a board member at Timken.
The spin is expected to take place on June 30th, although a ‘When-Issued’ market has already begun trading. The new company will trade on the NYSE under the ticker ‘TMST’ and Timken shareholders will receive one share of the new company for every 2 TKR shares owned. The company recently updated its earnings expectations and authorized a larger share buyback. Additionally, it hosted investor days for itself and TimkenSteel. For more information check out their presentations and of course, the Form 10 filings.
Disclosure: Author holds no position in any stock mentioned.