During an auction for the 122-year-old historic steelmaker, Nippon Steel (5401.T) of Japan, they emerged victorious over competitors such as Cleveland-Cliffs (CLF.N), ArcelorMittal (MT.LU), and Nucor (NUE.N). The transaction was finalized on Monday, and Nippon Steel will acquire U.S. Steel (X.N.) for a cash price of $14.9 billion.

The purchase price of $55 per share reflects a vast 142% premium over the price on August 11, the penultimate trading day before Cleveland-Cliffs announced a cash-and-stock offer of $35 per share for U.S. Steel. The infrastructure package proposed by President Joe Biden includes provisions for expenditure and tax incentives, and it is a wager that U.S. Steel would gain from these provisions.

U.S. Steel initiated selling Cleveland-Cliffs four months ago due to the company’s pursuit. During a meeting of its board of directors that took place on Sunday, U.S. Steel determined that the offer made by Nippon was preferable to a sale to Cleveland-Cliffs, which had increased its price to a high range of $40 per share, according to individuals who are acquainted with the subject.

The largest steelmaker in the United States, Nucor, reportedly made a bid to purchase U.S. steel in conjunction with another business, according to one of the individuals. It was not possible to get aware of the identification of that firm.

According to reports from Reuters, ArcelorMittal also took an interest in U.S. Steel. Nippon and ArcelorMittal own a factory in Alabama that processes semi-finished goods, also known as slabs, obtained from domestic and international sources. This plant is responsible for the production of steel sheet products. Additionally, they are investing around one billion dollars in an electric arc furnace.

Nippon Steel, the fourth-largest steel manufacturer in the world, will be able to move closer to 100 million metric tons of global crude steel capacity due to its acquisition of U.S. Steel. Additionally, the company will be able to significantly expand its production in the United States, located in an area where steel prices are anticipated to increase due to automakers ramping up production in response to recent agreements with labor unions to end strikes.

To justify the price it agreed to pay, Nippon did not provide any projections on the value of the synergies resulting from the transaction. It was said that synergies will be achieved by combining innovative manufacturing technologies and specific expertise in product development, operations, energy savings, and recycling.

According to the statistics provided by LSEG, Nippon is paying an amount comparable to 7.3 times the profits before interest, taxes, depreciation, and amortization (EBITDA) of U.S. Steel for twelve months. The median in the steelmaking business is seven times, and some analysts stated that U.S. Steel was worth less than that given that its $774 million acquisition of the Big River steel mill in Arkansas in 2021 had not yet paid off in terms of profitability.

We have the impression that Nippon is underpaying for such assets. Indeed, this is not an area of technology. The cyclical nature of the steel sector is still present, according to Gordon Johnson, an analyst at GLJ Research.

Following the acquisition news, U.S. Steel’s shares were trading at $49.92, representing a 27% increase. In Tokyo, the trading of Nippon Steel shares had come to a close before the announcement of the transaction by the business.

In New York, Cliff’s shares increased by ten percent, reaching $20.54, as shareholders expressed their satisfaction with the company’s decision to forego the acquisition of U.S. Steel. Cliffs said it would carry out “aggressive share buybacks” through a scheme it previously authorized.

Similar investor relief led to a 5% increase in the price of ArcelorMittal shares in Amsterdam, which reached 26.23 euros.

Moreover, according to the sources, Cliffs will most likely be unable to extend a contract to supply slabs to the Alabama facility of ArcelorMittal and Nippon if it is unsuccessful in its bid to win the auction for U.S. Steel. This deal is set to expire in 2025. The sources went on to say that this is because Nippon will now start using U.S. Steel as a supplier. Understanding the significance of the interaction was not possible.

OPPOSES THE UNION
According to Nippon, all of the promises that U.S. Steel has made with its employees, including all of the collective bargaining agreements now put in place with its union, will be fulfilled.

Despite these promises, the United Steelworkers Union, which had previously supported Cliffs as the acquirer and was largely unionized, has stated that it is opposed to the sale to Nippon because it does not have trust that labor agreements would be honored.

“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 for,” a United Steelworkers spokesperson said. In response to a request to comment on more specifics of the union’s plans, a representative did not respond.

In an interview with Reuters, Nippon Executive Vice President Takahiro Mori stated that the firm has been operating in the United States for forty years and was optimistic that the acquisition would be finalized.

Standard Steel and Wheeling Nippon Steel, both of which we own, are unionized firms in the United States; we have a long history of cooperating with labor unions. According to Mori, no regulatory or antitrust concerns are associated with the transaction.

The partnership between Nippon and Arcelor is not a unionized enterprise.

After the Great Depression and World War II, the United States Steel Company, which was established in 1901 by some of the most powerful magnates in the United States, including Andrew Carnegie, J.P. Morgan, and Charles Schwab, became entwined with the process of the economic recovery in the United States.

The shares of the Pittsburgh-based firm had underperformed as of late, following many quarters of dropping revenue and profit. As a result, the company had become an appealing acquisition target for competitors who were eager to add a manufacturer of steel that is utilized by the car industry.

In addition to the automotive business, U.S. Steel is a supplier to the renewable energy industry. The Inflation Reduction Act (IRA) offers tax credits and other incentives for projects of this nature, which has attracted potential buyers.

According to statements made by U.S. Steel, the deal with Nippon is anticipated to be finalized by the second or third quarter of 2024, provided that regulatory permissions are obtained. Even though most Japanese acquirers can complete their transactions with very few problems, it is anticipated that the transaction will be reviewed by the Committee on Foreign Investment in the United States. This United States commission examines agreements for possible threats to national security.

On the other hand, Barclays Capital, Goldman Sachs, and Evercore are the financial advisers to U.S. Steel, while Citi is the financial consultant to Nippon.