Yesterday, the Timken Company (USA) officially completed its acquisition of The Torrington Company (USA) from parent Ingersoll-Rand (Bermuda). The acquisition had been announced and in process since early October 2002.

Valued at USD $840 million, the acquisition makes Timken the third-largest bearing manufacturer in the world, with projected annual sales of just over $3.8 billion. SKF AB (Sweden) and the newly-constituted INA/FAG (Germany) are the largest and second-largest, respectively.

Timken said it is moving quickly to integrate Torrington's various and diverse product lines into its automotive and industrial bearing businesses. The company said it expects leveraging those new economies -- consolidating purchasing, distribution and overhead operations, for example -- to save approximately $20 million within the first 12 months and $80 million by the end of 2005.

In the $840 million price, Ingersoll-Rand received $700 million in cash and approximately 9.4 million shares of Timken common stock, valued at $140 million fully diluted. The shares give I-R an 11% ownership share of Timken. Ingersoll-Rand said it expects to use the cash immediately in an effort to pay down debt, but has agreed to hold the Timken shares for at least six months through August 18, 2003.

The Torrington bearing businesses include Torrington, Fafnir, Kilian and Nadella brands. Torrington's services include research, repair, training and various troubleshooting and engineering services.

The acquisition also adds Torrington's sensor products. While Timken currently has a lineup of various bearing sensors, the addition of Torrington's wider range of industrial bearing sensors and related services dramatically improves Timken's market position against similar offerings from SKF and INA/FAG.

Finally, Timken inherits non-bearing operations such as Torrington's precision components section. This operation produces such products as steering shafts. Not included is NASTECH; in January 2003, Torrington finished unwinding its international NASTECH steering gear relationships with NSK.

To accomplish the Torrington acquisition, Timken has had to aggressively take on substantially higher debt and risk, in addition to shouldering the operational issues involved in integrating Torrington. There is also a turnaround aspect at Torrington, the legacy of I-R's treatment of the division in recent years as almost a nuisance operation.

Last week, Timken signaled the acquisition was imminent by announcing that on February 18 it would commence its public offering of 11 million shares of common stock at $14.90 per share. The approximately $164 million in proceeds will be used to fund the Torrington acquisition. Timken also announced it is concurrently offering $250 million in senior unsecured 5.75% notes due 2010 for the same purpose. Finally, Timken negotiated a $500 million bank credit facility maturing in five years.

All told, Timken is issuing approximately 20.4 million shares: 11 million in the public offering and 9.4 million to Ingersoll-Rand. The net effect is to increase shareholder equity by approximately $300 million. The additional debt raises Timken's debt-to-capital ratio from 44% to 53%.

Citing the increased debt and risk profile, rating agencies Moody's and Standard & Poor's both lowered Timken's corporate credit ratings. However, both agencies partially mitigated the move by noting that Timken's market position is improved by the acquisition, its cost structure is in place and the benefits of Torrington's higher value-added customized production capabilities.