Why the Nippon-U.S. Steel Deal Still Has a Chance of Getting Done
As unlikely as it might seem, a victory by the Japanese company can’t be ruled out
No matter how dead Nippon Steel’s 5401 -0.47%decrease; red down pointing triangle bid to buy U.S. Steel X -2.56%decrease; red down pointing triangle might look, don’t rule out a victory by the Japanese suitor just yet.
President Trump opposes the deal. But he also has changed his mind about TikTok, cryptocurrencies, Elon Musk and the timing of tariffs. He still could change his mind about this proposed sale, however faint that possibility might seem at the moment.
He could even declare, after further review, that approving the sale is “common sense,” as he likes to say.
There could be great upside for U.S. Steel shares, now around $37, if he did. Nippon Steel’s offer is valued at $55 a share, or $14.1 billion. Another U.S. steelmaker, Cleveland-Cliffs CLF -5.26%decrease; red down pointing triangle, has indicated it could make a play if Nippon Steel walks away and pays its $565 million breakup fee.
The prospect of another suitor provides some downside protection for U.S. Steel’s stock price, even if Cliffs isn’t likely to come close to matching the price Nippon Steel offered.
Trump has said U.S. Steel shouldn’t be owned by a foreign company. That is in line with President Joe Biden’s order last month blocking the deal just before he left office. U.S. Steel and Nippon Steel are asking the U.S. Court of Appeals for the District of Columbia Circuit to overturn that decision. They claim the government violated their due-process rights by making a predetermined decision on political grounds and then citing a nonsense reason after the fact. Justice Department attorneys in a court filing this week said the government wants Biden’s order to remain in effect.
Even if the lawsuit is a long shot on the merits, it puts the Trump administration in the potentially awkward spot of having to defend Biden’s reasoning in court. That might be all the more awkward because Biden’s rationale indeed strained credulity.
Biden’s opposition on the campaign trail last year was a direct appeal for votes in Pennsylvania. “I told our steelworkers I have their backs, and I meant it,” he said in March, before he withdrew his candidacy for re-election. In his Jan. 3 executive order blocking the deal, he said he believed Nippon Steel “might take action that threatens to impair the national security of the United States.”
The Committee on Foreign Investment in the U.S., which reviewed the proposed transaction, didn’t reach a consensus on national-security concerns or recommend blocking the sale when it referred the matter to Biden for a decision. Two weeks after Biden’s order, the U.S. approved the sale to Japan of more air-to-surface missiles.
There is a rather simple way forward, if the president were so inclined: He could withdraw Biden’s decision on the grounds that the prior administration’s process was deeply flawed, and then direct Cfius to start the review process over from scratch. That would buy time for the parties to come up with a deal that addresses Trump’s priorities, whether they are grounded in protectionism or other concerns.
It is possible that there would be only minimal political cost to Trump from reversing Biden’s decision. He could position himself as siding with union workers rather than union bosses. Steelworkers aren’t a monolith any more than auto workers, who supported Trump in droves last election.
United Steelworkers, which represents U.S. Steel employees in collective-bargaining agreements, opposes the sale. Yet plenty of workers have turned up for rallies to support it, concerned its failure would mean lost jobs because the company will close or move plants. Some local union officials joined an amicus brief—arguing for the deal—filed with the court.
All of this is backdrop for Trump’s cryptic comment at a Feb. 7 press conference with Japan’s prime minister, where he said Nippon Steel had “agreed to invest heavily in U.S. Steel, as opposed to own it, and that sounds very exciting.” U.S. Steel shares dropped on the remark, which investors saw as a hard no to a sale. Really, though, it is difficult to know what he was thinking, and no details have emerged since. It could have been an opening stance, a softening of his position, or a throwaway line.
U.S. Steel and its workers would benefit more from a sale to Nippon Steel than from having it as a minority investor or joint-venture partner. U.S. Steel needs capital to modernize its aging mills. Nippon Steel would have greater incentive to invest capital in a company it owns than in one it doesn’t control. And it isn’t going to pay a control premium, like it is offering now, for a minority or JV stake.
Some finality would be welcome, because the battle for U.S. Steel has become chaotic. In addition to the lawsuit against the government, U.S. Steel is suing Cleveland-Cliffs, alleging it conspired with steelworker union leaders to sabotage its Nippon Steel deal. (Cliffs denies the claims.) U.S. Steel also faces a proxy fight by an activist investor with ties to Cliffs. A Cliffs takeover bid could face challenges, too, because the combined companies’ U.S. market concentration might trigger antitrust concerns.
U.S. Steel’s importance lies largely in domestic politics and symbolism. It is the third-largest U.S.-based steel producer and the 24th largest in the world. Ultimately it is a small company in an industry awash in overcapacity globally. Nippon Steel is the world’s fourth-largest steelmaker. As part of the deal, it committed to invest $2.7 billion in U.S. Steel’s plants, with most going to its oldest steel mills near Pittsburgh and in Gary, Ind.
For U.S. Steel and its workers, the Nippon deal offers clarity and fresh capital. For Trump, it would be an expedient solution to a thorny problem that he could blame on his predecessor. He could still revive it.