For $14.9 billion, Japan’s Nippon Steel will purchase U.S. Steel

For $14.9 billion, Japan’s Nippon Steel will purchase U.S. Steel

After winning an auction to acquire the 122-year-old legendary steelmaker, U.S. Steel (X.N) for $14.9 billion in cash, Japan’s Nippon Steel (5401.T) defeated rivals Cleveland-Cliffs (CLF.N), ArcelorMittal (MT.LU), and Nucor (NUE.N).

The purchase price of $55 per share is a massive 142% premium over the closing trading day of August 11, when Cleveland-Cliffs announced a cash-and-stock bid of $35 per share for U.S. Steel. It’s a wager that the tax breaks and expenditures in President Joe Biden’s infrastructure program will help U.S. Steel.

Four months ago, Cleveland-Cliffs’ pursuit forced U.S. Steel to begin the sale process. Those with knowledge of the situation stated that U.S. Steel decided at a board of directors meeting on Sunday that Nippon’s offer was better than Cleveland-Cliffs’, which had increased its offering to approximately $40 per share.

According to one of the sources, Nucor, the biggest steel manufacturer in the United States, made an offer to jointly buy U.S. Steel. That company’s identify could not be ascertained.
U.S. Steel was also chased by ArcelorMittal, according to Reuters. At a mill owned by Nippon and ArcelorMittal in Alabama, semi-finished goods, or slabs, that are purchased from domestic and international vendors are processed to create steel sheet products. Additionally, they are spending almost $1 billion on an electric arc furnace.

With the purchase of U.S. Steel, Nippon, the fourth-largest steel manufacturer in the world, will increase its production in the United States, where steel prices are predicted to rise as automakers ramp up production in the wake of their recent labor union agreements to end strikes. This will help Nippon reach its goal of 100 million metric tons of global crude steel capacity.
To support the amount it agreed to pay, Nippon provided no estimate of the value of the synergies that will result from the agreement. It was stated that combining cutting-edge production technology with expertise in operations, energy conservation, recycling, and product development would result in synergies.

According to LSEG data, Nippon is making payments that are equal to 7.3 times the profits before interest, taxes, depreciation, and amortization (EBITDA) of U.S. Steel for the previous year. The industry median for the steel sector is seven times, and some experts have calculated that U.S. Steel’s value was lower because of the fact that its acquisition of the $774 million Big River steel factory in Arkansas in 2021 has not yet resulted in a profit.

“We believe Nippon is paying too much for those resources. This is not the domain of technology. This is still the cyclical steel sector,” said Gordon Johnson, analyst at GLJ Research.

Following the announcement of the deal, U.S. Steel shares ended trading up 26% at $49.59 on Monday. Before the business announced the acquisition, trading in Nippon Steel shares had ended in Tokyo.

In New York, Cliffs shares surged 10% to $20.50 as investors applauded the company’s decision to hold off on making a big purchase of U.S. Steel. Cliffs announced that it would now proceed with “aggressive share buybacks” as part of a previously approved program.

Similar investor comfort caused ArcelorMittal shares to rise 5% to 26.28 euros in Amsterdam.

According to the sources, Cliffs’ failure to renew a contract that ends in 2025 to supply slabs to ArcelorMittal and Nippon’s Alabama plant is expected to follow from losing the U.S. Steel auction. According to the sources, this is because Nippon will now look to U.S. Steel as a supplier. There was no way to ascertain the contact’s worth.
Nippon stated that U.S. Steel will uphold all of its obligations to its workers, including any collective bargaining agreements it has with its union.

The United Steelworkers union, which had supported Cliffs as the acquirer and was substantially unionized, stated that it was against the sale to Nippon because it did not believe that labor agreements would be followed, even in spite of these promises.

“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,” said the United Steelworkers.

A request for additional information regarding the union’s plans was not answered by a spokeswoman. United Steelworkers’ agreement with U.S. Steel states that it will not be able to stop the company’s sale as long as the buyer agrees to uphold the terms of the current labor agreements.

After 40 years of operations in the US, Nippon Executive Vice President Takahiro Mori told Reuters in an interview that the business was certain the deal would go through.

“Standard Steel and Wheeling Nippon Steel that we own are unionized companies in the United States; we have a good history of working with unions. We see no regulatory or antitrust issues with the deal,” Mori said.

The joint venture between Nippon and Arcelor is not unionized.

According to U.S. Steel, the deal with Nippon is anticipated to finalize in the second or third quarter of 2024, pending 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 deals for possible national security threats, even though most Japanese acquirers close their deals with little trouble.

Additionally, given the minimal overlap between Nippon and U.S. Steel, analysts predicted that the merger would not face much antitrust scrutiny. According to the firms, Nippon will be responsible for paying U.S. Steel a $565 million break-up cost if authorities reject the agreement.

Senator JD Vance, an Ohio Republican, stated that he will carefully consider its effects on the “security, industry, and workers” of the United States. Senator John Fetterman, a Democrat from Pennsylvania, went one step farther and vowed to use all of his resources “to block this foreign sale”.

Founded in 1901 by some of the biggest American magnates, such as Andrew Carnegie, J.P. Morgan, and Charles Schwab, U.S. Steel became deeply involved in the post-Great Depression and post-World War II economic resurgence in the United States.

Following several quarters of declining revenue and profit, the Pittsburgh-based company’s shares had recently underperformed, making it an appealing takeover target for competitors seeking to add a producer of steel used by the automotive sector.

In addition to automakers, U.S. Steel serves the renewable energy sector and has drawn interest from suitors because to the Inflation Reduction Act (IRA), which offers tax credits and other incentives for such projects.

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