NEW YORK, Jan 17
(Reuters Breakingviews) - Fury over the $14 billion sale of United States
Steel (X.N), opens new tab is burning as hot as the
company’s blast furnaces. An agreed deal with Japan’s Nippon Steel (5401.T), opens new tab fired
up politicians leery of ceding a century-old industrial icon to an overseas
owner; a rival angry about its bid being spurned; unionized workers worried
about their jobs; and customers pinched by protectionist policies. A national
security review will be the locus of this struggle, a case study in how chief
executives angling for mega-mergers are forced to contend with increasingly
vocal stakeholders at odds with one another.
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U.S. Steel
reluctantly started seeking a buyer in August after Cleveland-Cliffs turned up
with an unsolicited offer of about $8 billion, including the conversion of some
debt into equity. Between the challenge of consolidating ageing equipment and
organized labor’s antipathy toward management, the status quo at U.S. Steel was
no longer tenable. Its original suitor’s chief executive, Lourenco Goncalves,
won backing from the United Steelworkers. Combining the two companies seemed to
be the best option for both.
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The current situation
didn’t suit American carmakers either. Following 2018 tariffs imposed on
imported steel and aluminum by former President Donald Trump, a gap between
higher domestic and lower international metal prices has widened, according, opens new tab to
the U.S. International Trade Commission. U.S. production has not increased
enough to compensate. In 2022, the National Foreign Trade Council said, opens new tab wait times for many steel
products stretched as long as 20 weeks, far beyond the eight weeks that’s
generally considered adequate.
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Reuters Graphics
Steel-dependent
General Motors (GM.N), opens new tab and Ford Motor (F.N), opens new tab disclosed
that in their first year, the levies cost the equivalent of $700 per vehicle.
For them, a Cleveland-Cliffs (CLF.N), opens new tab deal
would be anathema, giving one company control, opens new tab over 60% of
automotive-grade steel and all the silicon-infused electrical steel used in
battery-powered cars.
Elected officials,
meanwhile, have seized on the transaction as an opportunity to champion
unionized workers and homegrown manufacturing as Americans gear up to vote in
November. And U.S. Steel shareholders will be up in arms if these various
standoffs cost them a lucrative 140% premium Nippon is willing to pay over
where their stock was trading just five months ago.
The conflicting
interests suggest that even though U.S. Steel ran the standard merger playbook
and accepted the highest bid, other considerations are becoming stickier.
So-called stakeholder capitalism, touted by Larry Fink, the boss of investing
behemoth BlackRock (BLK.N), opens new tab,
and others, seeks to expand the definition of value creation and to whom it
accrues. Corporate luminaries at the Business Roundtable even adopted, opens new tab the mantra in 2019. Hewing
to the ethos, Nippon is striving to placate the USW, hyping its green
credentials and positioning itself as the revitalizer of a national champion,
but failed to keep tempers from flaring.
CLIFFS-HANGER
Despite being
outgunned in the bidding war, Goncalves is preparing for a second chance. He
can’t easily undermine Nippon Steel on antitrust grounds as it has a negligible
U.S. presence. Buyers from abroad, however, face the Committee on Foreign
Investment in the United States, a panel of 16 government agencies that can
recommend the president nix a deal over national security concerns.
That the executive
branch plays so big a role invites passionate feedback. Goncalves is providing
some. In an unrelated ITC hearing in early January, he accused U.S. Steel of
selling out to a “foreign owned steel company” while “ignoring the negative
consequences ... to national security.”
Such consternation is
having an effect. At least seven U.S. senators have spoken out, with Democrat
Sherrod Brown explicitly, opens new tab backing Cleveland-Cliffs.
The White House called for “serious scrutiny.”
CFIUS has taken
unusual steps to kill big mergers before, like chipmaker Broadcom’s (AVGO.O), opens new tab $117
billion approach for Qualcomm (QCOM.O), opens new tab in
2017. And opposition from Capitol Hill can resonate. When the Treasury-chaired
committee approved Dubai Ports World’s 2006 takeover of shipping company
P&O, including operations at six American ports, congressional leaders went
on the attack and the buyer ultimately sold its U.S. operations.
Reuters Graphics
Since then, CFIUS’
clout has only grown. Its process is, on paper, predictable: a 45-day review
period, subject to a 45-day second phase, followed by either a recommendation
to the Oval Office or negotiated measures to mitigate concerns. But before the
official review begins, there’s typically an informal back-and-forth.
Cleveland-Cliffs
wants to be sure President Joe Biden feels the pressure. Union steelworkers
also have not been shy about decrying Nippon as their new employer. They, too,
have invoked national security concerns, alongside accusations of U.S. Steel
exhibiting a “greedy, short-sighted attitude.”
Goncalves clearly
doesn’t want to miss an opportunity if one should arise. Cleveland-Cliffs just
added well-rounded Ron Bloom to its board. The former vice chairman of
Lazard (LAZ.N), opens new tab brings dealmaking
experience, and as a onetime presidential special assistant to the USW has
labor connections, as well. Bloom also helped restructure bankrupt GM in 2008
while leading former President Barack Obama’s task force in Detroit. Appeasing
nervous automakers, even if they have no real say in the outcome, would be
useful; in October, they objected to a Cleveland-Cliffs takeover.
FORGING THE FUTURE
At its heart, this
fraught takeover battle will heavily influence the trajectory of what’s left of
the U.S. steel industry. Traditional blast furnaces are environmentally
poisonous, but they can produce higher-grade metal than high-technology
electric arc ones. Nonetheless, U.S. Steel and others are slowly migrating to
the newer models.
The transition
presents a risk to the USW, whose members operate the older machinery. The
union’s then president, Thomas Conway, made his constituency’s interests clear:
“Cliffs is committed to the blast furnace segment of the steel market and U.S.
Steel is not,” he told Reuters.
Goncalves defied
skeptical analysts by diversifying his iron ore pellet producer with the 2019
acquisition of AK Steel. Since then, profitability has lagged. A U.S. Steel
sale to Nippon would mean Cleveland-Cliffs loses a chance to consolidate the
domestic market and put its strategic plan on more stable footing.
Adoption of
electric-arc furnaces is also proving difficult for U.S. Steel. Investing in
new facilities has eaten into cash flow, and the company has consistently
traded at a lower multiple of expected EBITDA than peers. Nippon brings size
and the ability to fund itself more cheaply, helpful tools for navigating the
tough investment cycle.
Those factors will be
important. Biden’s agenda, embodied by the Inflation Reduction Act, involves
mobilizing billions of dollars into clean energy and EVs. His trustbusters also
have taken a hard line on mergers, one that makes a Cleveland-Cliffs deal seem
far-fetched.
CFIUS, of course,
only has the one transaction to consider and has extracted concessions from
Japanese buyers before. Masayoshi Son’s SoftBank Group (9984.T), opens new tab,
for example, agreed to relinquish managerial control to clinch its 2018
acquisition of buyout firm Fortress Investment. An outright block would be a
surprising break from precedent. Based on U.S. Steel’s undisturbed share price,
investors are imputing nearly 80% chance of success for Nippon. The stakes are
high, but winnable only by some stakeholders.
Follow @JMAGuilford, opens new tab on
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CONTEXT NEWS
Japan’s Nippon Steel
said on Dec. 18 that it had agreed to buy United States Steel for $55 per share
in an all-cash deal worth roughly $14 billion, after rival Cleveland-Cliffs in
August had proposed to acquire the American company for a little over $7
billion in cash and stock.
The United
Steelworkers’ union supported Cleveland-Cliffs’ bid and has opposed the Nippon
transaction. Republican U.S. Senators JD Vance, Josh Hawley and Marco Rubio on
Dec. 19 sent a letter to Treasury Secretary Janet Yellen urging her to block
the transaction. Democratic Senators John Fetterman, Bob Casey, Joe Manchin and
Sherrod Brown have also opposed the tie-up, with the latter explicitly favoring
a deal with Cleveland-Cliffs.
The Alliance for
Automotive Innovation, which represents automakers with a U.S. presence
including General Motors, in October said the industry opposes a combination of
U.S. Steel and Cleveland-Cliffs, which together account for an overwhelming
share of the domestic auto steel market.
In testimony before
the U.S. International Trade Commission on Jan. 4, Cleveland-Cliffs Chief
Executive Lourenco Goncalves criticized Nippon Steel and U.S. Steel, claiming
that the latter is “ignoring” the consequences of its sale on “critical
products to national security.”