Nippon Steel (5401.T) of Japan agreed to buy U.S. Steel (X.N) for $14.9 billion in cash on Monday, defeating rivals such as Cleveland-Cliffs (CLF.N), ArcelorMittal (MT.LU), and Nucor (NUE.N) in an auction for the 122-year-old famous steelmaker.
The purchase price of $55 per share marks a 142% premium over the previous trading day before Cleveland-Cliffs announced a cash-and-stock bid for U.S. Steel on Aug. 11. It is a wager that US Steel will gain from President Joe Biden’s infrastructure bill’s expenditures and tax breaks.
The pursuit of Cleveland-Cliffs spurred U.S. Steel to initiate a sale process four months ago. According to persons familiar with the situation, at a meeting of its board of directors on Sunday, U.S. Steel regarded Nippon’s offer superior to a sale to Cleveland-Cliffs, which had boosted its offering in the high $40-per-share area.
According to one of the sources, Nucor, the largest US steelmaker, has offered to buy US Steel in cooperation with another company. That company’s identity could not be discovered.
According to Reuters, ArcelorMittal was also interested in acquiring US Steel. Nippon and ArcelorMittal own a mill in Alabama that processes semi-finished goods, or slabs, sourced from domestic and international sources. They’re also putting $1 billion into an electric arc furnace.
The acquisition of U.S. Steel will assist Nippon, the world’s fourth largest steelmaker, in reaching its goal of 100 million metric tons of global crude steel capacity while significantly expanding its production in the United States, where steel prices are expected to rise as automakers ramp up production following recent labor-union settlements.
Nippon made no projections on the value of the synergies that would result from the transaction to justify the price it agreed to pay. The synergies will be realized by pooling modern manufacturing technologies and know-how in product development, operations, energy conservation, and recycling, according to the company.
According to LSEG data, Nippon is paying 7.3 times US Steel’s 12-month earnings before interest, taxes, depreciation, and amortization (EBITDA). The steelmaking industry median is seven times, and some analysts believe U.S. Steel is worth less because its $774 million buy of the Big River steel mill in Arkansas in 2021 has yet to pay off in terms of profitability.
“We believe Nippon is paying too much for those assets.” This isn’t the world of technology. “The steel industry is still cyclical,” said Gordon Johnson, analyst of GLJ Research.
Following the announcement of the deal, US Steel shares rose 26% to $49.59 on Monday. Nippon Steel shares had halted trading in Tokyo prior to the announcement of the deal.
Cliffs shares rose 10% to $20.50 in New York, as shareholders applauded the company’s decision not to invest in US Steel. Cliffs said it would continue with “aggressive share buybacks” under a previously authorized scheme.
In Amsterdam, ArcelorMittal shares jumped 5% to 26.28 euros on similar investor relief.
According to the sources, if Cliffs loses the auction for US Steel, it will be unable to renew a contract to supply slabs to ArcelorMittal and Nippon’s Alabama factory, which ends in 2025. This is because Nippon will now rely on US Steel as a supplier, according to the sources. The worth of the contract could not be determined.
THE UNION IS AGAINST
Nippon stated that all of US Steel’s promises to its employees, including any collective bargaining agreements in existence with its union, will be respected.
Despite these promises, the United Steelworkers union, which had backed heavily unionized Cliffs as the buyer, said it is opposed to the sale to Nippon because it does not believe labor agreements will be upheld.
“Our union intends to exercise the full measure of our agreements to ensure that whatever happens next with U.S. Steel, we protect the good, family-sustaining jobs we bargained,” the United Steelworkers said in a statement.
A spokeswoman did not respond to a request for additional information on the union’s plans. United Steelworkers is not given the ability to block the sale of the company in its deal with U.S. Steel provided the acquirer promises to preserve existing labor agreements.
In an interview with Reuters, Nippon Executive Vice President Takahiro Mori stated that the firm has been operating in the United States for 40 years and that it was certain the acquisition would be finalized.
“In the United States, we own unionized companies Standard Steel and Wheeling Nippon Steel; we have a good history of working with unions.” “We don’t see any regulatory or antitrust issues with the transaction,” Mori added.
The joint venture between Nippon and Arcelor is not unionized.
U.S. Steel expects the transaction with Nippon to close in the second or third quarter of 2024, subject to regulatory approvals.
The transaction is expected to be reviewed by the Committee on Foreign Investment in the United States, a U.S. commission that examines agreements for potential national security hazards, though most Japanese acquirers complete their deals with minimal complications.
Analysts also believe the transaction will face little antitrust scrutiny due to the limited overlap between Nippon and U.S. Steel. If regulators reject the agreement, Nippon will owe U.S. Steel a $565 million break-up fee, according to the businesses.
Some US lawmakers with steelworker constituencies have expressed opposition to the agreement. Republican Senator JD Vance of Ohio has stated that he will investigate its ramifications for the “security, industry, and workers” of the United States. Pennsylvania Democratic Senator John Fetterman went even further, vowing to do everything in his power “to stop this foreign sale.”
U.S. Steel, formed in 1901 by some of the country’s most powerful businessmen, including Andrew Carnegie, J.P. Morgan, and Charles Schwab, became inextricably linked with the country’s industrial resurgence following the Great Depression and World War II.
The Pittsburgh-based company’s shares had recently underperformed, following several quarters of declining revenue and earnings, making it an appealing takeover target for rivals eager to add a manufacturer of steel used in the automobile sector.
Aside from automakers, US Steel supplies the renewable energy industry and stands to benefit from the Inflation Reduction Act (IRA), which gives tax credits and other incentives for such projects, which drew interest.