One big Timken bearings and steel company or two smaller ones?
Tuesday’s annual shareholders meeting in Canton may decide the outcome of a pitch by the California State Teachers’ Pension System that $5 billion Timken Co. spin off its steel division.
Timken’s board and top executives oppose the measure, as does the United Steelworkers union that represents 2,300 hourly employees in the company’s Canton-area factories.
CalSTRS and its partner, Relational Investors LLC, meanwhile, say they need a simple majority — 50 percent plus one vote — to get their proposal passed. And they say they are getting strong support from other shareholders who see greater value in owning two “pure play” publicly traded Timken companies.
Even if the ballot proposal falls short, the two shareholders that own a combined 7.3 percent of Timken say the fight won’t end there.
They may decide to wage a business strategy known as a proxy war next year to replace some, or all, of Timken’s board with people who would support splitting the company. CalSTRS also acknowledged that its actions are unprecedented for the $163 billion pension fund.
As a result, while the ballot proposal is non-binding — meaning it does not force Timken to split — the outcome, no matter what, still has broad implications not just for Timken Co. and its employees but also the greater Canton community.
“They [CalSTRS and Relational] are exercising a right they have,” said Paul Lapides, director of the corporate governance center at Kennesaw State University in Georgia. “You own a part of the company, you should get the opportunity to say what you want to say.”
Relational Investors has a history of being a force for improving companies that it owns shares in, Lapides said.
This is also a reminder that executives of publicly traded companies should talk regularly with shareholders, he said.
“You don’t own your own company. You work for a lot of other people,” Lapides said.
Timken noted in a statement that even though the CalSTRS proposal is non-binding, it will take the voting outcome seriously.
“The board will take into account the results of the vote in determining what actions, if any, it would take related to the steel business,” the company said.
The company declined further statements other than to refer to what it has said in previous months and to the information on the website www.timkendrivesvalue.com.
‘Business model is working’
In the latest letter to shareholders on behalf of its board, Timken wrote: “The simple fact is that our integrated business model is working. The deep synergies between our Steel and Bearings & Power Transmission businesses provide us with a tremendous competitive advantage in the marketplace. This enables us to deliver value for our customers and for our shareholders,” the letter said.
“The proposal to separate our businesses made by CalSTRS and Relational Investors is misguided and shortsighted. It ignores the value we have created and the further upside potential in continued execution of our proven strategy,” Timken wrote. “Do not allow this strategy to be derailed by two investors who don’t understand how our business works. Do not give up long-term value-creation for the illusory short-term gains of financial engineering.”
CalSTRS, as the ballot item sponsor, will have a representative speak at Tuesday’s shareholders meeting. The event starts at 10 a.m. in Timken’s corporate auditorium at its headquarters off Dueber Avenue SW.
Relational will have people present but no speaking role at the meeting, said Ralph Whitworth, co-founder and principal at the California-based investment firm.
If the CalSTRS proposal fails to get more than a majority of shareholder support, Whitworth said the next step for Relational and the pension fund will be to analyze the votes. If they find significant support from independent shareholders — unaffiliated with Timken — then the company board “will have to take this to heart,” he said.
Proxy contest possible
And the next step could involve a proxy contest to control the board, Whitworth said. “The typical answer next year would be to seek some or all of the directors,” he said. Timken’s directors are elected to one-year terms.
It is an easier threshold for CalSTRS and Relational to elect directors to Timken’s board than to get a ballot proposal passed, said Philip Larrieu, CalSTRS investment officer. Directors are determined by a plurality of votes, meaning the highest vote-getters win, he said.
“The premise behind our engagement is to free the company to be more vigorous,” Whitworth said. “The idea is to strengthen these companies.”
A separately traded Timken bearings company and a Timken steel company should result in higher stock prices than a single combined Timken, the shareholders argue. While Timken stock currently trades in the $51 to $52 per share range, they estimate that the equivalent stock price of two separate businesses would be $69.
What would change?
There is no intention to close down or relocate steel mills, move one of the two companies elsewhere or to cut jobs, Whitworth said.
“We can understand the potential concerns here, fear of change,” Whitworth said.
“We think of it as more of a staff split than a separation of the company,” he said. Separate Timken bearings and steel companies can still share the same headquarters building, with employees staying at their same desks, he said.
“Daily routines would not change,” Whitworth said. The Timken family would be involved in both businesses, he said.
“They are both good businesses, better separated,” said Ann Sheehan, director of corporate governance at CalSTRS.
Deciding to pursue a spinoff of Timken’s steel division is an evolution of CalSTRS’ corporate governance program and not something the pension fund has tried to do with other companies, Sheehan said.
The Timken family, with three members on the board, has a disproportionate dominance there, she said. “That’s a governance shortcoming.”
The $163 billion pension fund also believes Timken is wasting shareholder money with bad capital allocations, she said.
“We are stewards over the assets that we manage,” said Whitworth.
Most of Relational’s clients are pension funds, he said. “We have the responsibility to engage companies.”
Union opposes measure
The Steelworkers union has officially opposed the ballot initiative and urges shareholders to vote against it, said Dennis Brommer, the union’s Canton-based subdistrict director.
“We don’t see any real good coming out of it,” he said. “We don’t think it’s good for our members. We think it’s a bad deal.”
Timken as currently configured works well, he said.
“It’s been a successful company. We’ve had good contracts with the company,” Brommer said. “It seems like an experiment we don’t need at this time.”
USW Local 1123 Golden Lodge told its 2,300 members that the Pittsburgh-based union’s analysis shows a combined Timken steel and bearings company provides greater economic security for them.
Sheehan said if people really look at the CalSTRS proposal, they will see it strengthens the community.
“They will have two Timkens to be proud of,” Whitworth said.
Tuesday will show how persuasive all of the arguments have been.
Jim Mackinnon can be reached at 330-996-3544 or jmackinnon@thebeaconjournal.com