Nippon Steel’s plan to acquire US Steel has triggered an uproar among the US Congress, the United Steelworkers and economic nationalists alarmed by the buyout of an American icon and the US$14.9 billion deal’s potential implications for US employment and the economy.
The reaction has been particularly strong in President Joe Biden’s birth state of Pennsylvania, where US Steel’s headquarters and several plants are located. Senator John Fetterman, a member of Biden’s Democratic Party, issued a populist statement saying:
I live across the street from US Steel’s Edgar Thompson plant in Braddock. It’s absolutely outrageous that US Steel has agreed to sell themselves to a foreign company. Steel is always about security – both our national security and the economic security of our steel communities. I am committed to doing anything I can do, using my platform and my position, to block this foreign sale.
This is yet another example of hard-working Americans being blindsided by greedy corporations willing to sell out their communities to serve their shareholders. I stand with the men and women of the [United] Steelworkers and their union way of life. We cannot allow them to be screwed over or left behind.
Fetterman was joined in opposition to the deal by a bipartisan group of politicians including Senator Bob Casey (Democrat, Pennsylvania), Senator J D Vance, (Republican, Ohio), Senator Josh Hawley (Republican, Missouri), Senator Marco Rubio (Republican, Florida), Congressman Chris Deluzio (Democrat, Pennsylvania) and Pennsylvania State Senator Jim Brewster (Democrat).
Do they have a case? On December 18, Nippon Steel and US Steel announced the signing of an agreement under which Nippon Steel will acquire 100% of US Steel in an all-cash transaction priced at $55 per share, equivalent to an equity value of $14.1 billion, Nippon will also assume US Steel’s debt, bringing the deal’s total enterprise value to $14.86 billion.
The purchase price is nearly 40% above US Steel’s closing stock price on December 15 of $39.33 and 57% more than the rival offer made by iron and steel company Cleveland-Cliffs last August, which valued US Steel at $35 per share.
US Steel’s share price jumped 26% to a 12-year high the day the Nippon transaction was announced and closed at $47.97 on December 22. Nippon Steel agreed to pay about 12 times earnings for US Steel, which is almost twice its own current valuation.
The Wall Street Journal noted, “that by shelling out so much for US Steel, Nippon [Steel] is actually making a bet that the American manufacturing renaissance will succeed, with steel demand heading structurally higher.” But, it continued, “That still won’t stop politicians from taking potshots.”
Cleveland-Cliffs CEO Lourenco Goncalves issued a statement saying:
We identified US Steel as an extremely undervalued company with significant synergy potential when combined with Cleveland-Cliffs, creating a union-friendly American champion among the top 10 steelmakers in the world.
Even though US Steel’s board of directors and CEO chose to go a different direction with a foreign buyer, their move validates our view that our sector remains undervalued by the broader market, and that a multiple re-rating for Cleveland-Cliffs is long overdue. We congratulate US Steel on their announcement and wish them luck in closing the transaction with Nippon Steel.
Closing the deal, however, could be difficult amid the nationalistic backlash. Senator Vance said, “Today, a critical piece of America’s defense industrial base was auctioned off to foreigners for cash.”
For cash plus the assumption of debt, actually, and a lot more than the competing offer. In short, a great deal for US Steel shareholders.
Nippon Steel’s share price declined after the announcement, dropping more than 5% on December 19. Since the end of November, when word of the transaction may have been circulating, it is down 13%. This raises a question: Is Nippon Steel making an overpriced mistake?
Judging from the reaction of the United Steelworkers, it might be. In both the announcement of the acquisition and its presentation to investors, Nippon Steel emphasizes that all of US Steel’s commitments to its employees and agreements – including collective bargaining agreements – with the union will be honored.
But United Steelworkers International President David McCall has his doubts. “We remained open throughout this process to working with US Steel to keep this iconic American company domestically owned and operated, but instead it chose to push aside the concerns of its dedicated workforce and sell to a foreign-owned company,” McCall said.
“Neither US Steel nor Nippon [Steel] reached out to our union regarding the deal, which is in itself a violation of our partnership agreement that requires US Steel to notify us of a change in control or business conditions,” he said.
“Based on this alone, the USW does not believe that Nippon [Steel] understands the full breadth of the obligations of all our agreements, and we do not know whether it has the capacity to live up to our existing contract,” McCall added.
Labor has good reason to fear corporate takeovers, but it is American, not Japanese, management that is known for mass lay-offs.
In fact, US Steel’s workforce shrank from 29,000 in 2018, when then-president Donald Trump slapped a 25% tariff on imported steel, to less than 23,000 in 2022. That figure is set to drop by another 1,000 due to the downsizing of the company’s plant in Granite City, Illinois, which was announced on November 28 this year.
All in all, US Steel’s workforce has been slashed by 25% since 2018. Trump’s tariff was supposed to protect American jobs but had the opposite effect, and the union couldn’t and apparently still can’t do anything about it.
Ironically, Dan Simmons, president of United Steelworkers Local 1899, which represents the workers in Granite City, told reporters that “The optimistic side of this [the acquisition] is that Nippon [Steel] was a part of a joint venture back many years ago with National Steel, when I was an employee then and they were a good partner to have.”
Rather than downsizing, Simmons says, “The right decision would be to fire those furnaces back up and make steel again because prices are very good.”
Nippon Steel may do just that. Its rationale for the acquisition includes the attractiveness of the US steel market, where quality standards are high and the rebuilding of manufacturing and infrastructure are expected to support long-term growth in demand.
It also needs to get behind the wall of tariffs first erected by Trump and built out by Biden that is unlikely to be dismantled regardless of who wins the presidential election in November 2024.
Nippon Steel has been operating in the US through joint ventures and largely- or wholly-owned subsidiaries since the 1980s. Wheeling Nippon Steel began as a joint venture with Wheeling-Pittsburgh Steel in 1984 and is now a 100%-owned subsidiary.
It was followed by the establishment of Nippon Steel Pipe America, International Crankshaft, the Indiana Precision Forge and Suzuki Garphyttan steel bar and wire companies, Standard Steel (steel wheels) and the steel sheet joint ventures NS Bluescope and AM/NS Calvert, which ArcelorMittal and Nippon Steel bought from ThyssenKrupp in 2014.
Nippon’s acquisition of US Steel, if it is completed, will be its ninth investment in the US. It would add US Steel’s integrated steel mills in the US and Slovakia to those of Nippon Steel in Japan, India, Thailand, Brazil and Sweden. Nippon Steel has downstream operations in China, Southeast Asia, the Middle East, Brazil and the US.
The deal would raise Nippon Steel’s total annual crude steel capacity from 66 to 86 million metric tons as calculated using the methodology of the World Steel Association – i.e., the sum of the nominal full production capacity of companies in which it has a 30% or greater equity interest.
Nippon Steel would then vault from 4th to 2nd place in the world steel rankings, overtaking Ansteel and ArcelorMittal to become nearly two-thirds the size of China’s top-ranked Baowu Steel, which has an annual crude steel production capacity of about 130 million metric tons.
The acquisition was unanimously approved by the boards of directors of both companies. It is subject to approval by US Steel shareholders and regulatory authorities, neither of which is expected to oppose the deal.
Nippon Steel plans to fund the transaction primarily through borrowings from Japanese banks, from which commitment letters have already been received. The deal is expected to close in the second or third quarter of 2024.
If US Steel had instead accepted Cleveland-Cliff’s offer, the combined entity would have had a monopoly on blast furnace steel production in the US and a dominant share of the market for steel used in the US motor vehicle industry.
As part of the Nippon Steel Group, the US steel industry will remain competitive. US Steel will retain its brand name and headquarters in Pittsburgh under the deal.
On December 19, Senators Fetterman and Casey and Representative Deluzio sent a letter to Treasury Secretary Janet Yellen, who is also chair of the Committee on Foreign Investment in the United States (CFIUS), urging her to block the proposed acquisition. They wrote:
With the passage of the Inflation Reduction Act, the Infrastructure Investment and Jobs Act, and the CHIPS and Science Act, the United States has acted to make the US market the most competitive in the world and to reshore critical supply chains. Allowing for the ownership of a major industrial participant in infrastructure and clean energy investments to be acquired by a foreign entity would be a step backwards in our commitment to supply chain integrity and economic security.”
We question whether a foreign company that has been found to be dumping steel into the US market at prices below fair market value is the best buyer for US Steel. Of further concern, Nippon Steel has facilities in the People’s Republic of China, a foreign adversary of the US.”
Senators Hawley, Vance and Rubio likewise wrote to Secretary Yellen, saying in a statement:
The transaction was not entered into with US national security in mind… [It] was not the product of careful deliberation over stakeholder interests, but rather the result of an auction to maximize shareholder returns.
Trade protections can and should induce foreign investment that expands domestic production and creates American jobs. This corporate takeover is out of step with those goals. Allowing foreign companies to buy out American companies and enjoy our trade protections subverts the very purpose for which those protections were put in place.
NSC [Nippon Steel Company] does not share US Steel’s storied connection to the United States, and its financial interests are tied into those of Japan. Earlier this year, NSC received more than $3 billion in subsidies from Japan’s Ministry of Economy, Trade and Industry. And NSC has even flouted American trade law. As recently as August 2021, NSC was found guilty of unlawfully dumping flat-rolled steel products into the US market.
The world’s leading business dailies have taken issue with these nationalistic views. The Wall Street Journal, for one, criticized both what it sees as a throwback to protectionism and the inability of politicians to distinguish between Japan and China. It asked: “Do they think the Japanese are going to bomb Pearl Harbor?”
The Financial Times, in an editorial entitled “The misguided US backlash against Nippon Steel raises a question of trust,” asks “If Japan does not count as a legitimate buyer of assets in the US, who does?”
Japan’s Nikkei said “US Steel takeover opposition sends the wrong message to Japan” and quotes Joshua Walker, president of the Japan Society, saying that “It sends all the wrong messages. We can’t celebrate Japan as our most important and critical ally and then attack Nippon Steel with the type of xenophobic rhetoric we are seeing.”
All this puts Biden, a self-proclaimed strong supporter of both labor unions and the US-Japan alliance, in a tight spot. In a statement issued by the White House, National Economic Advisor Lael Brainard said:
The President believes US Steel was an integral part of our arsenal of democracy in WWII and remains a core component of the overall domestic steel production that is critical to our national security. And he has been clear that we welcome manufacturers across the world building their futures in America with American jobs and American workers. However, he also believes the purchase of this iconic American-owned company by a foreign entity—even one from a close ally—appears to deserve serious scrutiny in terms of its potential impact on national security and supply chain reliability.
At this point, it seems likely Biden will pass the buck to Treasury’s CFIUS to approve or reject the deal. But the final decision may not be made until June or even September, which will put the US Steel-Nippon deal in a politicized spotlight in the run-up to the November 2024 election in an important swing state.
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