From our DCF calculations, the value of Torrington as a stand-alone entity is $1.181 billion. However, the maximum purchase price for Torrington should only be $641 million. The optimum debt amount for this transaction would be $301 million. This amount of debt would result in a total debt to capital ratio for Torrington of 47%, within the range for a BBB “investment grade” debt rating. The combined entities, Torrington-Timken, would produce an interest coverage ratio of 3.2, and a debt ratio of 45%, again within the range for a BBB “debt rating. The purchase would likely be a cash transaction. History
Founded by carriage-maker Henry Timken in 1899 in St. Louis, Missouri, the Timken Company was originally incorporated as The Timken Roller Bearing Axle Company. In the previous year, Timken had received a patent for a tapered roller bearing, this propelled the company to national success. Since 1916, the company has become heavily involved in steel and pipe making operations, in order to vertically integrate and have greater control over the steel used in its products.
The major end-users of bearing products are manufacturers in industries such as automotive, agricultural, and construction equipment. The demand for bearing products is closely linked to GDP, as bearings are used in almost all engineered or transportation goods. Growth in the bearing industry is directly proportional to global industrial production. For the period in discussion, bearing companies reduced their capital intensity by decreasing vertical integration, increasing outsourcing, and improving just-in-time manufacturing. The Timken Company is among several manufacturers that comprise the global bearing industry. Notable names are: Federal-Mogul Corporation, General Bearing Corporation, Kaydon Corporation, JTEKT Corporation, Minebea Co., Ltd., NSK Ltd., NTN Corporation, Schaeffler Group, and SKF Group.
Strategy of Synergies
The acquisition of Torrington would give Timken control over its largest domestic competitor in the bearing industry: With 12 manufacturing facilities and 3 engineering technology centers around the world, the acquisition could provide Timken a needle roller bearings business that would serve original-equipment and tier-one automotive manufacturers in North American, Europe and Japan.
Upon completion of the proposed acquisition, Timken would be the third largest producer of bearings in the world, allowing Timken to provide better value for its customers by offering nearly twice as many products. By tapping into Torrington’s international distribution network, Timken had an expectation of an increase in its global market share by an additional 4 percent, up to 11percent. The larger company with its increased purchasing power could realize saving by reducing the number of suppliers and greater volume discounts. Timken also was looking forward to reduction in sales personnel. All these synergies were expected to a net annual saving of $ 80 million.
The stand-alone value of the Torrington Corporation was found using two methodologies, Relative Valuation and Discounted Cash Flow. Closely following the guidelines of the given techniques, we found that the DCF valuation model proved a better estimate of value. The sample of competitors used for the relative comparison was widely scattered, often with opposing financial ratio histories. This created a bias to discard outliers, even though we were uncertain of their importance to the study. Given the limited data available, we agreed to smooth the data to accommodate the model, basing our adjustments on consensus. (Please see exhibits) Relative Model
Before running the relative valuation model, we compared Torrington to industry competitors, computing the market values of the given sample firms. From those market values we computed the following ratios: EBITDA/PRICE, SALES/VALUE,...