Jan 25, 2024 - Business

Inside U.S. Steel's decision to be acquired by Japan's Nippon Steel

Illustration of the Japanese flag made out of steel

Illustration: Sarah Grillo/Axios

When U.S. Steel last month agreed to be acquired by Japan's Nippon Steel, many pundits and politicians were aghast that such an iconic American company would even consider foreign ownership.

Driving the news: It turns out that the deciding factor was regulatory arbitrage, not price, according to a preliminary proxy statement filed this week.

Behind the scenes: There were several bidders, but the two most serious were Nippon and what's referred to as "Company D."

  • "Company D" was Ohio-based steelmaker Cleveland-Cliffs, per a source familiar with the situation. The same Cleveland-Cliffs that earlier in 2023 had unsuccessfully attempted to buy U.S. Steel for around $7 billion.

By the numbers: There were several rounds of bids and negotiations, but the upshot is that Cleveland-Cliffs eventually offered $54 per share in cash and stock.

  • That worked out to around $220 million less than the $55 per share all-cash offer from Nippon, but Cleveland-Cliffs also asserted that its merger would result in around $6.50 per share, or $1.45 billion, in "potential synergy value."
  • Plus, Cleveland-Cliffs had steelworkers union support (even though one might think some of its synergies were synonymous with job cuts).

Tipping point: U.S. Steel engaged outside advisers to assess regulatory risks.

  • Were it to go with Nippon, U.S. Steel expected a CFIUS review of national security implications.
  • Were it to go with Cleveland-Cliffs, U.S. Steel expected a DOJ review of antitrust issues.
  • Per the proxy: "A transaction with Company D would eliminate the sole new competitor in non-grain-oriented steel production in North America as well as eliminate a competitive threat to Company D's incumbent position in the U.S., and put up to 95% of iron ore production in the U.S. under the control of a single company."
  • It added that such a merger also would reduce competition when it comes to supplying steel products to auto manufacturers.
  • The CFIUS threat, meanwhile, was viewed as relatively mild. Plus, Nippon didn't require shareholder approval whereas Cleveland-Cliffs would have.

The bottom line: U.S. Steel picked the path of least (expected) resistance.

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