AP News

Timken shares return some of Wednesday gains

NEW YORK (AP) — Shares of Timken Co. slipped Thursday, a day an investor proposed that the company split itself in two, sending the shares higher.

THE SPARK: On Wednesday, investment firm Relational Investors said it had approached Timken's management with a proposal that the company separate its bearings and steel businesses. Wall Street reacted positively, although Timken said it had decided against the idea.

THE BIG PICTURE: Timken is based in Canton, Ohio. Relational, which owns a 5.7 percent stake in Timken, said the businesses do not fit together and that Timken would maximize value for shareholders by separating them. Timken said the business combination saves money and boosts revenue, and that diversification is an important benefit.

The company reported $5.17 billion in revenue in 2011, with about $1.84 billion coming from steel sales to external customers.

THE ANALYSIS: Jefferies & Co. analyst Stephen Volkmann said he thinks Relational is right that the business combination is holding down the price of Timken shares. He said that is normal for companies that operate in more than one industry, as their stocks typically trade lower than the individual value of their component businesses.

"We agree that the market is unlikely to properly reward either the steel or the bearing business for the secular improvements they have made as long as these businesses remain combined," he wrote.

Volkmann downgraded Timken shares to "Hold" from "Buy," citing the company's price rise. He holds a price target of $45 per share. Volkmann said the breakup idea has been put to Timken before. He said the company's competitors have all separated their steel and bearing businesses, but Timken is in the process of adding steel capacity.

The analyst said Relational will need to buy more shares or get more support if it wants to convince Timken to spin off the steel business. He said Relational also may try to get representation on the company's board of directors.

SHARE ACTION: Timken stock lost $2.15, or 4.7 percent, to $44.08 in afternoon trading. The shares rose 11.6 percent on Wednesday and closed at $46.23, their highest closing price since early July.

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