Japan’s Nippon Steel sealed a deal to buy US Steel for $14.9 billion in cash on Monday, winning an auction for the 122-year-old iconic steelmaker amid claims it has overpaid for the industrial giant.
The deal price of $55 per share represents a whopping 142% premium to August 11, the last trading day before Cleveland-Cliffs unveiled a $35-per-share, cash-and-stock bid for US Steel. It is a bet that US Steel will benefit from the spending and tax incentives in President Joe Biden’s infrastructure bill.
Cleveland-Cliffs’ pursuit prompted US Steel to launch a sale process four months ago. In a meeting of its board of directors on Sunday, US Steel deemed Nippon’s offer superior to a sale to Cleveland-Cliffs, which had raised its bid in the high $40-per-share range, people familiar with the matter said.
ArcelorMittal also pursued US Steel, Reuters has reported. Nippon and ArcelorMittal own a plant in Alabama that produces steel sheet products by processing semi-finished products, or slabs, procured from local and overseas suppliers. They are also investing about $1 billion in an electric arc furnace.
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The acquisition of US Steel will help Nippon, the world’s fourth largest steel maker, move toward 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 their recent deals with labour unions to end strikes.
Nippon did not give any projection on the value of the synergies that will arise from the deal, to justify the price it agreed to pay. It said the synergies will come from pooling advanced production technology and know-how in product development, operations, energy savings and recycling.
Nippon is paying the equivalent of 7.3 times US Steel’s 12-month earnings before interest, taxes, depreciation and amortisation (EBITDA), LSEG data shows. The median in the steelmaking industry is seven times, and some analysts said US Steel was worth less given that its $774 million takeover of the Big River steel mill in Arkansas in 2021 has yet to pay off in profitability.
“We feel Nippon is overpaying for those assets. This isn’t the technology space. This is still the cyclical steel industry,” said Gordon Johnson, analyst at GLJ Research.
US Steel shares ended trading up 26% at $49.59 on Monday following the deal announcement. Nippon Steel shares had ended trading in Tokyo before the company unveiled the deal.
The transaction with Nippon is expected to close in the second or third quarter of 2024, subject to regulatory approvals, US Steel said.
The Committee on Foreign Investment in the United States, a US panel that scrutinises deals for potential national security risks, is expected to review the transaction, though most Japanese acquirers complete their deals with few issues.
US Lawmakers’ Opposition
Analysts also said the deal should attract little antitrust scrutiny given the limited overlap between Nippon and US Steel. The companies said that in the event that regulators shoot down the deal, Nippon will owe US Steel a $565 million break-up fee.
Some US lawmakers whose constituencies have major steelworker populations expressed hostility toward the deal. Republican Senator JD Vance of Ohio said he will scrutinise its implications for the “security, industry, and workers” of the United States.
Democratic Senator John Fetterman of Pennsylvania went further, vowing to do anything in his power “to block this foreign sale”.
US Steel, founded in 1901 by some of the biggest US magnates, including Andrew Carnegie, JP Morgan and Charles Schwab, became intertwined with the United States’ industrial recovery following the Great Depression and World War Two.
The Pittsburgh-based company’s shares had underperformed of late, following several quarters of falling revenue and profit, making it an attractive takeover target for rivals looking to add a maker of steel used by the automobile industry.
Beyond car makers, US Steel supplies the renewable energy industry and stands to benefit from the Inflation Reduction Act (IRA), which provides tax credits and other incentives for such projects, something that attracted suitors.
- Reuters with additional editing by Sean O’Meara
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