NEW YORK, Sept 12 (Askume Breakingviews) – Inadequate heat may hamper the welding process, but U.S. Steel Corporation (XN) has a bigger problem. Violent nationalism and labor protests are blocking the 123-year-old company’s merger with Japanese rival Nippon Steel Corp (5401.T), while skeptical U.S. safety regulators are preparing to derail the $15 billion deal. While owner David Burritt may be forced to shape his metal fabricator differently, there are ways to keep it relatively robust.
The battle over U.S. Steel is a microcosm of industry-wide struggles. More carbon-intensive blast furnaces produce better-quality steel. Although the smooth surfaces of automotive panels are tougher for new electric arc furnaces, they are moving faster and offer better economics. The estimated full-year EBITDA margins of U.S. Steel and blast furnace rival Cleveland-Cliffs (CLF.N) and Steel Dynamics (NUE.N)The more advanced Nucor Steel ) trailed by 15%.
According to the World Steel Association, the United States currently accounts for 68% of total power generation. US Steel further fueled the shift by acquiring Big River Steel a few years ago and then investing $3.4 billion in an expansion project called BR2.
The problem is that investing erodes free cash flow. U.S. Steel expects to spend more than $700 million this year, according to Visible Alpha estimates. Steel prices rose during the pandemic but then fell. The company’s blast furnace business EBITDA forecast for 2024 has fallen 35% since February. Some facilities are idled, while others need expensive overhauls.
It was no surprise that Burritt accepted Nippon’s offer of $55 a share in December. Prices are up from about $20, where they had previously been at a low point. It also blames tough policy changes and strained relations with the United Steelworkers union, which represents blast furnace workers. Big, non-unionized rivers gobble up money once allocated for unionized factories.
Nippon is making a last-ditch effort to avoid the deal being rejected by the Committee on Foreign Investment in the United States, which reviews inbound acquisitions. However, if that doesn’t happen, all is not lost for Burritt.
While a failed deal could lead to job losses and other negative consequences, U.S. Steel’s turnaround potential is huge. Its power business already has higher profit margins than the company’s other businesses. If you value the unit’s expected 2025 EBITDA at about 7 times that of Nucor Steel and about 5 times that of Cleveland-Cliffs Steel, U.S. Steel is worth about $11 billion (including debt). That’s less than what Nippon paid for control, but 11% more than the current price. Big Rivers also offers the added benefit of showing new ways to strike while the iron is hot.
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Referral Information
Nippon Steel Vice Chairman Takahiro Mori is scheduled to meet with officials from the Foreign Investment Committee in the United States on September 11 to urge approval of the company’s acquisition of US Steel, the Financial Times reported, citing unnamed sources.
Askume also reported on September 4, citing unnamed sources, that US President Biden’s administration was taking action to block the deal. The merger was announced for December 18, 2023, with US Steel valued at $55 per share.
Lourenco Goncalves, chief executive of rival U.S. Steel Corporation Cleveland-Cliffs, congratulated the government on its September 5 intervention, but also said his company “is ready” to buy U.S. Steel Corporation. Any union-represented assets would be shut down. U.S. Steel Corporation Chief Executive David Burritt said his company might have to close steel plants and move its headquarters if the Nippon Steel deal fails.
