Nippon Steel’s bid for U.S. Steel could face hurdles

Employees tend to the pig iron caster at the U. S. Steel Gary Works in Indiana. Image: U.S. Steel

Nippon Steel’s deal to acquire iconic Pittsburgh-based steelmaker U.S. Steel turned out to be the biggest news story for 2023. It also might be the big story for 2024 and perhaps 2025 as well.

Bloomberg has reported that Nippon Steel’s $14.1 billion deal for U.S. Steel might not close until 2025, well after the Q2 or Q3 2024 close date both companies have tentatively targeted. (The offer goes up to $14.9 billion if you include the U.S. Steel debt that Nippon Steel would assume.) That’s because a national security review of the deal by the Committee on Foreign Investment in the United States (CFIUS) could take longer than initially expected.

To be clear, a CFIUS review on its own was not a surprise. Nippon Steel and U.S. Steel requested one when they announced the deal on Dec. 18.

I don’t have any inside information on why such a long review might be necessary. Nippon is a Japanese steelmaker, and Japan is a key U.S. ally, hosting significant U.S. military operations.

The Atlantic Council, a think tank, summed up the unusual optics in a column on Jan. 8: “Washington blocking such a sale to a close Group of Seven (G7) partner would indicate that CFIUS has veered from narrow national security concerns to the business of broader economic protection.”

Election Year Politics

From a domestic political standpoint, I can see why kicking the can into 2025 might make some sense.

On one hand, President Joe Biden probably doesn’t want to alienate members of the United Steelworkers (USW) union, a key constituency in battleground states like Minnesota, Michigan, Pennsylvania, and Wisconsin. This especially holds true in what could be another close contest between him and former President Donald Trump in November.

The USW, meanwhile, wants an acquisition by Cleveland-Cliffs, and the union has ramped up a campaign against the Nippon deal. The union contends that certain aspects of it violate its labor agreement with U.S. Steel.

“The USW is prepared to continue this grievance process all the way to its conclusion as we hold management accountable for trying to cash in by selling out American steelworkers,” David McCall, USW international president, and Mike Millsap, negotiating committee chairman, said in a letter to union members on Jan. 12.

Shareholders Along for the Ride?

On the other hand, it’s hard to see Wall Street—or anyone with shares in domestic steelmakers—taking kindly to government intervention. If U.S. Steel is worth $14.1 billion, or $55 per share, a huge premium to where shares were before the deal was announced, then other domestic steelmakers are in theory worth a lot more too. But how do you determine valuations if Washington were to intervene and, citing national security, say that a lesser offer for U.S. Steel was better? And potentially it could be a lot less. The next best offer for U.S. Steel is Cleveland-Cliffs, which bid $7.3 billion over the summer.

It might be tempting to set aside what the USW is saying as noise. But Cliffs has made some moves recently that hint at a serious attempt to derail the deal.

The Long Shadow of Wheeling-Pittsburgh, CSN, and Ron Bloom

Cliffs announced a price increase on Jan. 3. That announcement got plenty of attention in the market that day. (Would it stick? Would Nucor follow?) The steelmaker also announced that it was appointing Ron Bloom to its board of directors. That second announcement deserved more attention than it got.

Bloom is a managing partner and vice chair at private equity firm Brookfield Asset Management. He began his career as an investment banker at Lazard. Bloom also has held key roles in the Obama, Trump, and Biden administrations. In short, he has ties to both Wall Street and Washington.

You could say that’s a prerequisite for being a lobbyist. What really sets Bloom apart are his ties to and history with the steel industry and the USW.

He worked in 2002, for example, to advance the sale of the former LTV Steel and the former Bethlehem Steel to the International Steel Group (ISG), which was headed by Wilbur Ross, U.S. Department of Commerce secretary for Trump. ISG then sold those mills to ArcelorMittal, and ArcelorMittal in 2020 sold them to Cliffs.

Does someone with deep ties to politics, finance, manufacturing, and labor have enough clout to help block a nearly $15 billion deal? Maybe. Here’s the part of that Jan. 3 release that bears repeating well after it was first circulated: “Bloom was also a key player when the USW successfully used the union’s successorship rights in their Basic Labor Agreement to block the sale of Wheeling-Pittsburgh Steel to a foreign buyer in 2007.”

In case you missed the point, Cliffs Chairman/President/CEO Lourenco Goncalves in the same release said: “We have recently seen a case of stunning disrespect to the wishes of labor in our industry, and Ron Bloom being on our board will ensure that all stakeholders have a voice.”

There is a lot to unpack there. Let’s take a trip in the way-back machine.

Wheeling-Pittsburgh, whose operations included what is now JSW Steel USA’s sheet mill in Mingo Junction, Ohio, was in financial trouble in the early 2000s. Brazilian steelmaker Companhia Siderúrgica Nacional (CSN) in 2006 agreed to buy the struggling company and combine it with its operations in Terre Haute, Ind., (now SDI Heartland).

The idea was for Wheeling-Pittsburgh to supply substrate to Terre Haute, which makes value-added products such as pickled and oiled, cold-rolled, and coated sheet. It made sense. But then Sewickley, Pa.-based service center Esmark, with union support, succeeded in stymying the CSN deal and acquiring Wheeling-Pittsburgh in 2007.

Sounds familiar, right?

Cliffs could be implying that history will repeat itself, as they could see Nippon Steel being what CSN was nearly 20 years ago. A big foreign steelmaker’s bid for a smaller U.S. one might again be derailed—thanks in part to union efforts.

Goncalves, Bloom, and the USW would presumably have to come up with an offer to match or better the $14.9 billion that Nippon Steel has agreed to buy U.S. Steel for. Can they? If not, what would the next-best offer be?

Here’s another history lesson. Esmark blocked CSN and successfully acquired Wheeling-Pittsburgh in November 2007. Less than a year later, Esmark sold the company to Russian steelmaker Severstal for $1.25 billion.

So what, exactly, was accomplished? A potential Brazilian owner was replaced by a Russian owner. How did that stop foreign ownership of U.S. mills or abate concerns about national security?

This much is fair to say in the meantime. We spent four months, August to December, waiting to learn who the winning bidder for U.S. Steel would be. We might spend a lot longer than that waiting to hear whether the deal will close.

It might be a long shot. But if Cliffs and the USW succeed in blocking a deal, what comes next?

Nippon Steel has pledged to keep U.S. Steel’s headquarters in Pittsburgh, where the USW also is based. What happens to U.S. Steel’s headquarters if Cliffs ultimately succeeds? I’d wager you a case of Iron City beer that the headquarters would move to Cleveland.

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