For more than a year now, the acquisition of United States Steel Corporation (NYSE:X), the iconic American steel giant, has appeared nothing short of inevitable.
With several bidders, including Cleveland-Cliffs (NYSE:CLF) and Nippon Steel (OTC:NPSCY) (TYO:5401), going head-to-head for the best offer, ultimately leading to a high $ 55-a-share bid from the Japanese giant - a 142% premium to US Steel's stock price on August 11, the day before Cleveland-Cliffs announced its $35-per-share bid -, the full buyout of the US’s second-largest steelmaker appeared on the way to a positive solution for the shareholders of the company.
However, as political and regulatory pressures intensify, making the acquisition increasingly tricky, industry observers speculate that a successful deal may only be possible if US Steel, Nippon Steel, and Cleveland-Cliffs collaborate.
US Steel Merger Concerns
Pricing in an 80% likelihood of the merger materializing in February, JPMorgan more than doubled its price target for X, from $26 to $52. Similarly, Morgan Stanley set its target for the Pensilvania-based company at a high $51.
Both banks were considering that the Japanese giant’s bid was well above the share price and would not pose an issue for antitrust regulation due to its current small market cap in the US market.
In that scenario, Nippon’s bid was a solution to the Cleveland-Cliffs and ArcelorMittal (NYSE:MT) - another early bidder - proposals, which had faced several regulatory hurdles due to the two companies' strong presence in many parts of the US steel industry.
But then, suddenly, what was an already complicated merger took on epic proportions, rendering comments from President Biden and Former President Trump, both saying they were against the deal’s conclusion.
The pushback is due to the frontal opposition from the United Steelworkers union (USW) and several members of Congress against the deal: “I told our steel workers I have their backs, and I meant it. US Steel has been an iconic American steel company for more than a century, and it is vital for it to remain an American steel company that is domestically owned and operated,” Biden said in a statement last week.
Consulted by Investing.com, the union stated that “in its efforts to control US Steel, Nippon Steel decided that rather than acquiring US Steel’s business directly, it would instead push its obligation onto a Houston-based holding company called Nippon Steel North America (NSNA),” it said through an official statement. “This means that NSC would not assume our labor, pension, retiree insurance, and other agreements. Instead, NSNA would acquire the business and take responsibility for our contracts,” it added.
Pennsylvania, the home state of US Steel, is considered a critical swing state for the upcoming presidential election in October. Given the USW’s historical political influence, both parties have deemed it key to secure its support - which seems now to have fallen under the Democrat’s spell. “We obviously share the president’s concerns over the sale’s long-term implications for our economic and national security, and we’re grateful for his ongoing support,” said the union.
Now, with Biden meeting with Japan’s prime minister Kishida on April 11, what started off as a potential banner case for ‘friendshoring’ between the two countries risks escalating into a foreign policy discomfort.
“Maybe the approval gets delayed until after the elections,” says Gordon Johnson, CEO of GLJ research.
Due to the growing challenges, BMO, the top US bank for metals and mining deals, lowered its price target for US Steel to $45 three days ago. The bank’s report blames “no new update regarding the transaction with Nippon, with the amplified political pressure increasing the completion risk in our view.”
The announcement comes as Politico reports that the $14.1 billion bid by Nippon Steel is now under investigation by the US Department of Justice for potential antitrust issues.
“This is a very unusual situation. We do not see an antitrust or a national security issue involving Nippon Steel, which would be the two reasons for blocking this deal. It’s solely political at this point,” says an industry source who asked not to be identified. “Normally, you don’t need a union approval for this type of deal,” the source explained.
Cleveland Cliffs Vs. Nippon Steel
Cleveland-Cliffs has also been exerting pressure against the completion of the Nippon Steel bid, mainly through its CEO, Lourenco Goncalves.
Recently, Goncalves mulled another much lower $30-a-share deal for US Steel, saying his company has the full support of the UNW and the necessary governmental support to get it through.
“Cliffs is the only company the union would endorse to acquire,” said the CEO. David McCall, USW President, confirmed the matter.
At this price, US Steel would be valued at $6.7 billion - significantly lower than the $14.1 billion offered by Nippon Steel.
“I would say that 30 bucks is a very good offer. Three zero. Not 35, not 34, not 33, not 31, but 30 rounded in an all-cash bid - that would be good enough for US Steel,” said Goncalves.
Lourenco also bragged about being in full contact with the Biden administration regarding the developing story. “We have been in total contact with the administration, so I know what’s going on,” Mr. Goncalves told the media.
He also added that there’s no chance of the Nippon Steel going through. “I have full conviction a Nippon Steel-USW deal ‘will never happen,’ said the CEO.
However, despite Cleveland-Cliffs’ aggressive approach to the matter, regulatory issues will likely continue weighing on the Cleveland-based company’s chances of a successful bid.
A report reviewed by Investing.com shows that US Steel was concerned that a merger with Cleveland-Cliffs risked being shot down by antitrust regulators because it would massively consolidate the supply of steel to US automakers and put up to 95% of US iron ore production under the control of one company.
The companies are the sole remaining operators of basic oxygen/blast furnace steel mills in the U.S. Both companies also produce grades of “electrical steel” used in several applications.
Can the Deal Still Go Through?
According to an industry source interviewed by Investing.com, yes, it can—in spite of all seeming odds. The source told Investing.com that it believes Goncalves’ rhetoric could be seen as part of the negotiation process between all parties involved.
“There are lots of ways to win. And I think a deal that would involve the three parts—Nippon Steel, Cleveland-Cliffs, and US Steel—is increasingly looking like a win for everyone.”
According to the source, in such a deal, Nippon would acquire the mining of US Steel’s operation - which is non-unionized - leaving the rest of the operation for Cleveland-Cliffs.
“There are several ways in which Cleveland-Cliffs and Nippon Steel could get together, and I see this as the most plausible solution.” “In my opinion, sooner or later, these guys will sit down and solve the matter,” the source added.
Still, according to the source, Nippon Steel would want to get this done before the elections, as the risks could increase with a new Trump presidency. Recently, the former US president made his intentions clear. “I would block it instantaneously. Absolutely,” Trump said after a meeting with the president of the Teamsters labor union. “We saved the steel industry. Now, US Steel is being bought by Japan. So terrible.”