Nippon Steel - US Steel: the American dream becomes reality, but at what cost?

The saga of the US Steel acquisition is coming to an end. Nippon Steel, the world's fourth-largest producer, has reached an agreement with the US government to buy the steelmaker. The deal is worth $14.9bn, the same as the initial offer made at the end of 2023. However, this time, numerous conditions have been added.

To obtain the green light from the US authorities, the Japanese giant has made several major concessions:

• an investment of $11bn in the US by 2028,
  
  
• a guarantee that strategic decisions concerning US operations will remain subject to the US government's veto,
  
  
• and, in return, easier access to the US market through a partial exemption from customs duties.
  
  

A political move

The US Steel case had taken on an eminently political dimension in the run-up to the 2024 presidential election. Based in Pennsylvania, one of the famous swing states in the election, the group had become a symbol of US industrial interests. Both Joe Biden and Donald Trump had publicly opposed its sale to a foreign buyer.

In May, Donald Trump mentioned a possible partnership. Today, a complete acquisition has been announced. The Republican president has given his green light on condition that national security guarantees are signed. According to the two steelmakers, this has now been done.

Many analysts fear that the government's famous veto will become a modus operandi for future strategic acquisitions.

A high price for Nippon Steel

The transaction amount remains unchanged from the initial offer in December 2023: $14.9bn for 100% of US Steel's capital. But in the meantime, conditions have changed considerably.

By way of comparison, Cleveland-Cliffs, the second-largest US producer and 22nd largest worldwide, made an offer in the summer of 2023 that valued the company at $10bn, without being subject to such constraints. The Japanese group, the world's fourth largest, is thus acquiring the third largest US player and 24th largest worldwide with a premium of 142% over the previous share price in December 2023... and a heavy debt burden on top of that.

A sector under pressure

The industrial gamble is not without risk. Global steel production fell by 0.9% in 2024, and growth in the sector is expected to be modest this year. Overcapacity remains a major problem, exacerbated by the flooding of the international market by the Chinese. With domestic demand falling sharply in the wake of the real estate crisis, Chinese steelmakers have turned to international exports, severely damaging competition. The OECD estimates that 2021 represented the peak in steel prices... closely correlated with the Chinese real estate crisis.

Margins are suffering, even for the major players. ArcelorMittal's EBITDA margin will fall from 24.88% in 2021 to 9.36% in 2024. Nippon Steel's will fall from 15.19% to 11.72%.

Consumer countries are tending to localize production, steel consumption will eventually decline, and competition is fiercer than ever. Nippon Steel justifies this strategy by pointing to the growth of high-end steel in the United States and better access to US contracts. ArcelorMittal is also investing heavily to develop its US infrastructure.

A divisive move

The financing of the operation raises questions. According to Japanese manager Shibata, Nippon Steel could raise nearly $7bn in equity. Full debt financing is ruled out. S&P has estimated that debt financing would be a burden that would weaken the group's solvency.

Shareholders are divided over the transaction. The massive investment commitments are causing concern. Activist fund 3D Investment Partners is calling for a vote against the reappointment of Nippon Steel's executives, fearing "irreversible value destruction."

Others believe that a US presence is essential to the group's long-term strategy.

Opinion on the transaction is therefore divided. Warnings about the Japanese multinational's financing capabilities are outweighing sentiment, and the stock is down slightly (-2.5%).