Nippon Steel agrees to buy US Steel for $14.1 billion

The deal ends months of uncertainty over the future of US Steel, an icon of American industry, which has been considering bids since it rejected an offer from rival Cleveland-Cliffs Inc. in August. Nippon Steel’s all-cash offer is significantly higher than the roughly $7.25 billion Cliffs offered at the time, and a whopping 142% premium to US Steel’s share price on the last trading day before it announced its strategic review.

For Nippon Steel, Japan’s biggest steel producer, the transaction provides a large foothold in the American steel industry when US demand is poised to benefit from rising infrastructure spending. US Steel is a key supplier to the lucrative automotive market in particular. The Japanese company has been seeking growth overseas as it faces a slowdown in demand at home, combined with a weakening yen and surge in competition across Asia.

US Steel’s shares jumped 26% to close at $49.59 in New York on Monday. Nippon Steel shares fell as much as 6.1% in early trading in Tokyo on Tuesday.

Cliffs rose 9.6%, as the company indicated it is refocusing on share buybacks as a use of capital — choosing to walk away rather than doubling down on its pursuit. ArcelorMittal SA, which had also been reported as a potential buyer, gained 5.3%.

The deal announced Monday would create a steel giant with plants stretching from Slovakia to Osaka and Pennsylvania. The combined firm would be the world’s second-biggest steelmaker with more than 86 million tons of capacity, leapfrogging European giant ArcelorMittal, according to a company presentation and Bloomberg calculations. Only China’s state-owned China Baowu Steel Group Corp. would have more.

However, the deal is already shaping up as a political lightning rod, after the influential United Steelworkers union criticized the foreign takeover and urged US regulators to apply close scrutiny. At least three US senators said they oppose the deal.

In a presentation, Nippon Steel said it was expanding its US presence to benefit from a growing population, cheap energy and renewed focus on building infrastructure. The company said it had secured commitments to finance the transaction from Japanese banks.

Analysts weighed in on the deal, noting Nippon Steel’s offer was higher than market expectations. Keybanc Capital Markets analyst Phil Gibbs said in a note to clients that the implied enterprise value of about $14.9 billion was “well above recently rumored” levels, while Wolfe Research analyst Timna Tanners called Nippon Steel a “wild card” paying a “lofty price.”

For American industry, the takeover will mark the end of an era. US Steel traces its roots back to 1901 when J. Pierpont Morgan merged a collection of assets with Andrew Carnegie’s Carnegie Steel Co.

It has undergone a dramatic shift in recent years under CEO David B. Burritt, as its investment focus pivoted away from traditional blast-furnace production of steel from iron ore, toward more modern and less-polluting plants that remelt metal scrap instead.

The company was catapulted into the spotlight in August after revealing it had rejected an offer from Cliffs and begun a strategic review. The announcement kicked off a dramatic few weeks, as the USW threw its support behind Cliffs’ pugnacious chief executive, while a little-known buyer startled the industry with an even larger offer, before abruptly pulling its interest days later.

As US Steel considered its options, analysts speculated certain buyers would be more focused on the firm’s Big River Steel plant in Arkansas, which uses the greener and more efficient electric arc furnaces, while seeking to offload the older blast furnace assets.

However, Nippon Steel executive vice president Takahiro Mori said the company intends to continue with US Steel’s existing plans for the company, including completing the Big River project and continuing to operate the legacy steelmaking assets. He said the company is “supportive” of US Steel’s strategy.

“After a few years we may think in another way, but at this moment we are just following the current plan.”

Passing CFIUS
The deal requires US Steel shareholder approval, and will need to clear regulators, including the Committee on Foreign Investment in the US, or CFIUS.

Nippon Steel’s Mori said he is confident on clearing regulatory hurdles, pointing to Japan’s strong relationship with the US. “I don’t have any concern about passing CFIUS,” he said.

A handful of US politicians had already started weighing in Monday on the deal — slamming a foreign purchaser of the iconic American company and citing concerns about what the deal means for union workers.

The two companies have agreed that US Steel will keep its name and Pittsburgh headquarters. Nippon Steel also said it will honor all agreements US Steel has with the USW, which has repeatedly said it won’t support any foreign bidders.

Strained relations
Relations between the USW and US Steel remain strained. USW president David McCall said he received a call at 6 a.m. New York time from US Steel CEO Burritt, who left a voicemail. McCall said it would have been the first time he had spoken to the executive since becoming the union’s top official in September, following the death of former president Tom Conway.

“This is not how this is going to work,” McCall said in an interview. “We don’t know Nippon.”

The union had a transferable right — which it had said it would pass on to Cliffs — to counterbid after an offer for US Steel as part of its collective bargaining agreement.

However, Cliffs in a statement congratulated US Steel on the deal and wished it well with the transaction. Cliffs will refocus its capital allocation priorities towards more aggressive share buybacks, CEO Lourenco Goncalves said.

Citigroup Inc. is acting as financial adviser to Nippon Steel, while Barclays Plc, Goldman Sachs Group Inc. and Evercore Inc. are advising US Steel.