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With its $14 billion offer likely blocked, Nippon Steel now must find another way to counter glut from China

Japan’s biggest steelmaker hoped it could counter China’s export onslaught with a deal in the U.S., where it would enjoy protection from Chinese rivals. Instead, it found U.S. politics was an equally challenging foe.

The already-slim prospects for Nippon Steel’s 5401 -0.38%decrease; red down pointing triangle $14 billion proposed takeover of U.S. Steel X 3.47%increase; green up pointing triangle have narrowed further with President Biden poised to use his executive powers to block the deal, according to a person familiar with the matter.

Like many steelmakers in Asia and around the world, Nippon Steel has been hammered by Chinese competition. China is flooding global markets with steel it doesn’t need at home because of a real-estate bust, and it is stepping up supply of minerals in which it holds dominant positions. That has helped push down prices.

In a quarterly report last month, Nippon Steel said it faced an “unprecedentedly harsh business environment” because of low profit margins triggered by a glut of Chinese steel exports. In the 12 months through July, China’s exports reached 101 million metric tons—more steel than the U.S. consumed all last year.

China produces around half the world’s steel and accounts for around half of global steel consumption, according to the World Steel Association. Its exports have triggered a backlash in countries that can’t hope to compete with China’s scale. Brazil, Chile, South Africa and Turkey have raised or are considering raising tariffs on imported Chinese steel.

“It’s a little bit scary,” said Shinichiro Nakamura, president of Daiwa Steel Tube Industries, which makes steel tubing used for scaffolding in Japan. His firm doesn’t compete with Chinese rivals directly but is feeling the pressure on prices from Korean competitors that are using Chinese steel. “They have more room to squeeze costs and lower the price,” he said.

Executives at Nippon Steel and U.S. Steel pitched the deal as a way to combat China’s rise, describing it as a commercial counterpart to the military alliance between the U.S. and Japan that dates back seven decades.

Accentuating its focus on the U.S., Nippon Steel this summer withdrew from a decadeslong alliance with China’s Baoshan Iron & Steel. In recent years, the two had been fighting a legal battle over Nippon Steel’s allegations of intellectual property theft, which Baoshan denied. The relationship, once celebrated as a symbol of Japanese-Chinese cooperation in industrial development, ended with a coldly worded two-paragraph news release.

U.S. Steel’s chief executive, David Burritt, said in a June podcast that the combination with Nippon Steel would “strengthen the alliance for us to be able to take on China, not just from a military-type standpoint with somebody in the Asian theater, but also because of the steel that they actually produce in China.”

The opportunity was attractive to Nippon Steel because it could expand its U.S. business without having to worry much about Chinese competition. In May, the Biden administration raised tariffs on Chinese steel to 25%, on top of a separate 25% tariff on steel imposed under the Trump administration and other tariffs imposed over the past decade. For the first seven months of this year, imports of Chinese steel to the U.S. were down 26%, according to the Census Bureau and the American Iron and Steel Institute.

Both administrations have pushed for a manufacturing revival in the U.S. including more steelmaking at home.

Nakamura said the U.S. needed technology from allies such as Japan to revive its steel industry, which is centered on electric-arc furnaces that use recycled scrap metal rather than forging new steel. Nippon Steel promised to invest billions of dollars to upgrade U.S. Steel’s aging plants.

But Nippon Steel repeatedly miscalculated the political implications of a foreign company taking over a major employer in Pennsylvania, one of the most important swing states in this year’s neck-and-neck presidential race. Trump and Biden both came out against the deal, following the lead of local politicians and the United Steelworkers union.

Takahiro Mori, the Nippon Steel executive in charge of pushing the deal, said last month that “I believe the momentum will change” because “certain politicians have been very supportive of this acquisition.”

Vice President Kamala Harris, the Democratic presidential candidate, threw cold water on such hopes this week. She said at a Labor Day campaign stop in Pittsburgh that U.S. Steel should remain domestically owned.

Takahide Kiuchi, an economist at Nomura Research Institute, said the politicians’ statements ran counter to Washington’s push to line up allies to tame China. A move to bar the acquisition “will sow the seeds of future trouble and have bad effects on trust between Japan and the U.S.,” he said

A Japanese government spokesman declined to comment on reports that Biden would reject the deal.

Nippon Steel is on the hook for a $565 million breakup fee if the deal falls apart. Its bigger challenge would be finding a growth engine to replace U.S. Steel because its home market in Japan isn’t likely to expand.

Artificial intelligence research lab Safe Superintelligence raised $1 billion from a litany of big-name investors including Andreessen Horowitz and Sequoia Capital.

The round valued the Palo Alto, California-based company at $5 billion, per Reuters, which first reported the round.

SSI, co-founded by OpenAI‘s former chief scientist Ilya Sutskever, is looking to develop safe artificial intelligence systems — something that has been in the news a lot recently as fears increase of AI tech being harmful to humans and society.

A proposed California bill that has proven controversial in the industry is looking to put safety regulations and guardrails on AI — although many companies, including OpenAI, worry it may be too burdensome to many AI firms.

The 3-month-old startup will look to add computing power and hire new talent.

More money

SSI’s big raise was not the only big raise of the day.

Japan-based startup Sakana AI locked up a $100 million round led by Khosla Ventures, Lux Capital and New Enterprise Associates. The round also included an investment from Nvidia — which has been intensely active in the AI space investing in startups.

Sakana is looking to train low-cost generative AI models with small datasets — a very different approach from OpenAI. The company previously raised a $30 million round in January led by Lux Capital.

There is some easing of the drought for private-equity firms, but don’t call it a bounceback yet

Not long ago, private-equity firms were on top of the world. They were raising record amounts of money, and cheap debt powered a deal frenzy. Then the Federal Reserve began raising interest rates, and the music stopped.

Today, buyout firms remain under pressure and are settling into a new normal of slower, less-profitable dealmaking. The hope is that things might pick up in 2025 if the Fed, as expected, begins to cut rates this month and if November’s presidential and congressional elections result in some measure of political certainty.

Already there are some promising signs. Deals in which public companies are taken private, for example, are on the rise. This year through late July, there have been 13 megadeals globally—defined as those valued at more than $5 billion—versus eight in all of 2023, according to data from S&P Global Market Intelligence. Transaction value totaled $123.64 billion as of July 29, far more than the roughly $75 billion in megadeals struck in all of last year.

Meanwhile, a drop in bond yields ahead of a possible Fed move has led to more activity in the leveraged-loan market. That has helped fuel about $164 billion of leveraged buyouts in the U.S. as of early September, not far off the approximately $169 billion done in all of 2023, according to Dealogic.

Still, the buyout bust is far from over, and sales of companies remain elusive.

One reason: Many deals were struck during the heady days of 2020 and 2021. Firms are unlikely to sell businesses today for the price they paid back then, let alone at a premium.

That has led firms to put off sales in the hope of a narrowing of the price-expectation gap between buyers and sellers. The gulf between the two sides has slammed exit activity, which tracks how many companies private-equity firms sell.

As of June 30, some 424 businesses were sold by firms in the U.S., or only about a third of exits in all of 2023, according to the data provider PitchBook. This year’s second quarter was particularly moribund, producing the lowest number of exits in the past decade, save for the onset of the Covid-19 pandemic. Tim Clarke, lead analyst for the private-equity group at PitchBook, said he expects the number of exits to settle higher owing to late reporting of deals.

The value of exit deals, at about $141 billion, was on pace with that seen in the same period in 2023. Yet total deal value that year, at around $286 billion, was the lowest since 2012.

A lack of deals has a knock-on effect on private-equity investors including pension funds. Huge pools of their cash are now effectively frozen in buyout funds, making them less likely to commit more capital.

Through the second quarter of this year, 704 funds have been raised globally, attracting about $366 billion in new capital, according to S&P Global Market Intelligence and Preqin. If the capital flow continues at the same pace through the remainder of the year, S&P and Preqin estimate total fundraising will decline about 20% from 2023.

Among funds raised this year, the European private-equity firm EQT had one of the largest sums, notching about $24 billion in new investment. Tech-focused Silver Lake collected roughly $21 billion, and Vista Equity Partners amassed about $20 billion.

Although some large funds are able to collect capital, midmarket firms trafficking in smaller deals are having a harder time raising more money. This is because their limited partners have less cash to dole out since they already have so much exposure to private equity.

What’s more, many of those investors, and especially pension funds, are clamoring for cash returns, which are few and far between owing to the slump in exit activity.

In 2021, the average percentage rate of net asset value returned to investors was about 31%. It dropped to roughly 12% at the end of 2023, according to Hamilton Lane Data via Cobalt.

To send money back to their stakeholders, firms are getting creative. They are selling small chunks of companies to each other to free up cash.

Among these stake sales were some of the biggest deals in the past year, including the sale of 50% of Veritas’s health tech company Cotiviti to KKR at an $11 billion valuation and Bain’s sale of a stake in the building-materials company US LBM to Platinum Equity at a roughly $7 billion valuation.

“The pressure to put money to work and the pressure to return capital hasn’t abated; it has only intensified,” said Jeffrey Greenip, the global head of financial sponsors at the investment bank Jefferies.

BMW and Toyota’s hydrogen cars will use powertrains, which contain the engine and transmission, developed in tandem by the companies

BMW BMW 1.09%increase; green up pointing triangle and Toyota 7203 -2.17%decrease; red down pointing triangle will partner to develop hydrogen-fueled electric cars in a push to turn a nascent market into a mass market.

The German carmaker said Thursday that it will release hydrogen-powered versions of one of its existing model lines in 2028 as part of its strategy—which Toyota shares—to broaden its reach with various fuel types. BMW and Toyota’s hydrogen cars will use powertrains, which contain the engine and transmission, developed in tandem by the companies, according to a joint statement.

Hydrogen-powered cars, known in the industry as fuel-cell electric vehicles, or FCEVs, run on electricity generated from hydrogen when it mixes with oxygen inside a fuel cell. Traditional electric vehicles rely on electricity stored in a battery.

“It is basically electric driving,” Michael Rath, BMW’s vice president of hydrogen vehicles, told reporters.

With its hydrogen push, BMW is targeting consumers who want cleaner vehicles but don’t have EV chargers at home, or who must drive a lot and cannot rely on charging networks, Rath said. Fueling them is faster than charging traditional EVs, and is more akin to filling up a tank at a gas station, he said. He added that they also have greater towing capability and are less affected by temperature.

BMW stressed that it doesn’t view hydrogen cars as a replacement for battery-powered cars, which consumers have cooled on after a burst in demand last year. The company sees hydrogen as a second option.

“We don’t see battery-electric vehicles and fuel-cell vehicles as competitors. Rather, we think they complement each other,” Rath said.

Infrastructure for hydrogen cars is far sparser than charging stations for electric vehicles and, of course, gas stations. The European Union mandated hydrogen refueling stations across Europe in its Alternative Fuels Infrastructure Regulation. And BMW is in talks with energy suppliers, both on the fueling and production side, Rath said. Both companies said they will play a role in expanding infrastructure and are invested in the growth of the hydrogen economy.

Safety concerns present another barrier for vehicles powered by hydrogen, which is highly flammable. According to Rath, BMW has run crash tests that prove its cars are safe. BMW’s iX5 hydrogen concept vehicle has been tested on the road since last year.

BMW didn’t provide targets for sales volumes or production. BMW and Toyota won’t rule out selling the tech that they develop to third parties, Rath said.

The partnership will extend to commercial vehicles as well.

Capital is expected to help data-center and AI cloud company grow

Artificial-intelligence chip giant Nvidia NVDA -1.66%decrease; red down pointing triangle is joining other investors in a $160 million financing round for Applied Digital APLD 2.86%increase; green up pointing triangle, a company that operates data centers and is building a business leasing out computing power for AI.

Investors in the deal include Nvidia and real-estate firm Related Companies, Applied Digital Chief Executive Wes Cummins said. The deal will bring in capital for Applied Digital via a purchase of new shares from the Nasdaq-listed company, which had a market value of more than $500 million as of Wednesday’s close.

Other companies in the arena, including CoreWeave, an AI cloud-computing business, have drawn investments from Nvidia and seen their valuations rise in recent months. CoreWeave was valued at $19 billion in a funding round earlier this year.

Applied Digital builds and leases out data-center space to others. More recently, it has also started an AI cloud-computing operation fueled by Nvidia’s chips.

“We have been doing a lot with Nvidia, and I think we’re unique in that we have both the cloud aspect and the data center build-out,” Cummins said. “I think both are important to them.”

Applied Digital will use the money to fund the company’s growth and to help underpin planned debt-financing deals, Cummins said. The company is seeking debt financing for a major data-center project in North Dakota, as well as to expand its cloud-computing business.

Nvidia has scaled up its investment activity amid the AI boom, supporting the ecosystem of companies that use its chips and giving it insight into the cutting edge of AI development. The company more than tripled the number of its investments last year compared with the year before.

Among its most recent investments, Nvidia took part in a $100 million funding round this week for Sakana AI, a Japanese AI research company.

As part of the Applied Digital deal, a private placement, the company agreed to issue around 49 million shares of its common stock at $3.24 a share, its closing price on Tuesday.

Shares of the company have been volatile this week, falling more than 13% Tuesday amid a rout in AI-related stocks. They rose by nearly 3% in trading Wednesday.