Steel Industry Shakeup: Analyzing ArcelorMittal’s Potential Bid for US Steel (Update 12/18: Nippon Steel Corporation (NSC) to Acquire U.S. Steel)

Topic: Pending Merger Analysis Reading Time: 15 min

Different reports indicate that ArcelorMittal is the leading bidder to take over US Steel. Let’s delve into this potential deal and analyze its implications for both players, competition, and the overall market should it come to fruition.

US Steel has been on the market for a few months now. Back in August, a bid from Cleveland-Cliffs was rejected, and the prevailing expectation was that they would hold the pole position in acquiring the company. However, following the rejection, US Steel entered into confidentiality agreements with “numerous” third parties. This move was accompanied by the initiation of a formal review process. US Steel has been transparent about its potential sale, especially after receiving the initial bid from Cleveland-Cliffs. Subsequently, they commenced their analysis and opened the doors to potential bids from other industry players.

Steel Market Dynamics

The global iron and steel market is projected to witness growth in the forthcoming years, with an anticipated compound annual growth rate (CAGR) of 6.1%, reaching $1,654.16 billion by 2023 (compared to 2022). Subsequently, it is forecasted to achieve $2,014.90 billion by 2027, boasting a CAGR of 5%. Within the global market landscape, ArcelorMittal stands as the second-largest producer of crude steel, tallying 68.89 million tonnes. Meanwhile, Nippon Steel Corporation holds the fourth position, boasting an output of around 44.37 million tonnes, and US Steel secured the 27th spot in 2022, producing 14.49 million tonnes. Notably, China Baowu Group leads as the largest producer, with an impressive 131.84 million tonnes. Examining the nations contributing to crude steel production, China retains a firm grasp on the top position at 1018.0 million tonnes, while the United States holds the fourth position, recording 80.5 million tonnes in 2022.

A potential collaboration between ArcelorMittal and Nippon Steel could enhance their prospects of finalizing the deal. Conversely, there exists the possibility of antitrust concerns coming to the forefront should this partnership not materialize. The US regulatory bodies and government might lean towards a preference for an American entity like Cleveland-Cliffs to acquire US Steel. In the steel production hierarchy of 2022, Cleveland-Cliffs occupied the 22nd position globally, producing 16.80 million tonnes. Should they merge with US Steel, this alliance would position them as the 10th largest producer worldwide, surpassing Tata Steel. The major stakeholders in US Steel, namely The Vanguard Group (holding 9.25%) and BlackRock Fund Advisors (with an 8.48% stake), wield considerable influence in determining the buyer. While the US government might advocate for a domestic takeover, these significant players possess the clout to advocate for the most lucrative acquisition strategy.

Financials

US Steel rejected a $7.3 billion cash and stock bid from Cleveland-Cliffs back in August. The share price of US Steel has been steadily rising over the past couple of weeks due to reports of potential additional bidders. Despite these reports, Cleveland-Cliffs remains the sole bidder to have publicly made an offer for the company. According to Bloomberg, final bids for US Steel are anticipated shortly after some site visits scheduled for next week. CNBC’s Faber suggested that the sales process might conclude by the end of the month.

Currently trading at $34 per share, US Steel boasts a market value of $7.58 billion. Speculators anticipate that the final bid could surpass the $40 per share mark, potentially valuing the company at $8.92 billion. Betaville reported an ‘uncooked’ alert on Wednesday, suggesting that ArcelorMittal is in advanced discussions with Societe Generale and Credit Agricole to finance a bid for US Steel. There’s further speculation that ArcelorMittal is partnering with Nippon Steel in this bid.

If ArcelorMittal were to solely finance the deal alongside both financial institutions at the expected $40 per share, this would account for 70 to 80% from the financial institutions, leaving ArcelorMittal to contribute between $1.8 billion and $2.7 billion. However, collaborations between multiple financial institutions and a financially strong acquirer may lower the percentage contributed by the acquirer.

ArcelorMittal presently holds a market value of around $18.80 billion. Last year saw a challenging period for the company, experiencing a 37.80% decline in net revenue year-on-year, resulting in a net revenue of $9.30 billion. Despite this, the proposed deal is anticipated to be feasible without significantly impacting ArcelorMittal’s financial health and stability. Both companies faced difficulties last year, yet the cyclical nature of the steel industry often presents takeover opportunities at opportune moments.

M&A Operations

ArcelorMittal has exhibited significant activity in the mergers and acquisitions (M&A) sphere over the past few years. Some standout acquisitions include John Lawrie Metals (March 2022), Votorantim Siderurgia (March 2018), and Riwald Recycling (January 2022). More recent additions to their portfolio encompass Indian Steel (June 2023), Zlomex (January 2022), and a second instance of Riwald Recycling (January 2022). Conversely, US Steel holds a comparatively limited acquisition history, with its major recent acquisition being Big River Steel (January 2021).

Should this takeover materialize, integrating US Steel could pose challenges relating to cultural assimilation, governance, and internal controls. However, I believe ArcelorMittal has demonstrated its capabilities in past integrations, potentially amassing the necessary expertise for a seamless assimilation. Moreover, ArcelorMittal already maintains a presence in North America and stands as a leading steel producer in the region. While it’s a market open for further expansion, their existing expertise in the area is substantial. I would recommend involving individuals with established roles in the region within the integration management office to aid in US Steel’s incorporation into the company.

Nevertheless, the integration might not immediately be extensive; initially, supportive functions could be merged, followed by optimization projects aimed at enhancing efficiency and streamlining processes. This approach might extend beyond supportive functions to encompass mining and distribution processes.

Considering the company’s long-term objectives and innovation potential, ArcelorMittal’s global reach and market size can serve as a catalyst in furthering the evolution of US Steel, preparing it for the years ahead. The escalating emphasis on sustainable production methods necessitates continuous innovation and research and development (R&D), areas that can benefit significantly from a larger budget.

Conclusion

In conclusion, though challenges are inherent in major acquisitions, ArcelorMittal’s strategic positioning, financial prudence, and prior successes in the M&A arena set a promising precedent for cautious optimism. The ArcelorMittal-US Steel deal holds the potential to reshape the global steel industry landscape. Navigating the regulatory, financial, and integration challenges with care will be pivotal for ensuring its success.

Update 12/18: Nippon Steel Corporation (NSC) to Acquire U. S. Steel

Official statement from Nippon Steel Corporation: NSC to acquire U. S. Steel for $55.00 per share in an all-cash transaction representing 40% premium, providing certain and immediate value to U.S. Steel shareholders. Brings together two storied companies with rich histories of providing excellent products and services and contributing to the development of society. Combines world-leading technologies and manufacturing capabilities to better serve customers in the United States and globally. Strengthens a diversified and competitive steel industry in the United States to the benefit of customers through investment collaboration between two global steel innovators. NSC to honor all collective bargaining agreements with United Steelworkers Union as part of commitment to maintaining strong stakeholder relations. Drives the global steel industry towards decarbonization and a sustainable world. U.S. Steel to retain its iconic name and headquarters in Pittsburgh, PA. Transaction represents culmination of U. S. Steel’s robust strategic alternatives process. Creates significant value for both NSC and U. S. Steel shareholders.