Activist fund Relational Investors LLC and a large public pension fund jointly reported a 6.15 percent stake in Timken Co (TKR.N) and said the diversified manufacturer should split into two publicly traded companies.
Shares of Timken, which makes mechanical components and high-performance steels, jumped 11.6 percent to $46.23 on the New York Stock Exchange, valuing the company at more than $4.4 billion.
In a joint regulatory filing on Wednesday, Ralph Whitworth's Relational Investors and the California State Teachers' Retirement System said Timken should spin off its steel business and hire investment bankers to evaluate their proposal.
The investors said they met with Timken management and board members in August and told them the company is significantly undervalued due to its combination of two different businesses and separating those units would maximize shareholder value.
"Following the meeting, there is no evidence in the company's public disclosures or otherwise that the company has taken steps to independently evaluate the potential value creation of a spin-off of the steel business," Relational and CalSTRS said in the filing.
They said Timken's stock has potential to rise by more than 50 percent to $64.98 if the businesses were separated, which would eliminate misunderstandings of the assets by investors who specialize in the different sectors.
Timken, in a statement, said that separating its business "at this time would not be in the best interests of Timken shareholders."
Timken said it reviewed Relational's proposal this summer with input from outside financial advisers.
"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," James W. Griffith, president and chief executive of Timken, said in the statement.
Relational and CalSTRS said they intend to continue discussions with Timken's management and board, and may seek representation on Timken's board by nominating directors at a shareholder meeting.
Last month, Timken posted a lower quarterly profit and cut its full-year forecast for the second time this year due to weakness in its auto and energy markets.
Timken's steel segment represented 37 percent of the company's total revenues and 34 percent of operating income in 2011.
(Reporting By Soyoung Kim and Lynn Adler; Editing by Gary Hill and Leslie Adler)