Few saw it coming. Just look at the price.
Shares in
U.S. Steel
soared Monday after the company announced that it had agreed to be acquired by
Nippon Steel.
Japan’s largest steel maker will buy
U.S. Steel
for $55 a share in cash, representing a 40% premium to the stock’s price on Dec. 15, plus the assumption of debt, for an enterprise value of $14.9 billion.
It’s also 50% higher than the mid-August cash and stock bid from
Cleveland-Cliffs
that helped set off U.S. Steel’s strategic review process. Cliffs bid is $17.50 a share and 1.023 shares of
Cleveland-Cliffs
stock for every share of U.S. Steel, worth some $36.63 based on its recent share prices.
It’s a large premium to an existing bid. Cliffs didn’t immediately respond to a request for comment from Barron’s about its plans following the Nippon announcement.
U.S. Steel stock was up about 26% in Monday trading to $49.63. Shares in
Nippon Steel
fell 1.1% in Tokyo trading. The
S&P 500
was up 0.4% and the
Dow Jones Industrial Average
gained 0.1%.
The deal, if it passes regulatory muster, is expected to close in the second or third quarter of next year. It Steel includes a commitment by Nippon Steel maintaining U.S. Steel’s relationships with the United Steelworkers union, the companies said.
“NSC has a proven track record of acquiring, operating, and investing in steel mill facilities globally—and we are confident that, like our strategy, this combination is truly Best for All,” U.S. Steel CEO David B. Burritt said in a statement.
There will be some opposition to the deal. The United Steelworkers, who represent many U.S. Steel employees, isn’t happy with the proposed combination.
“To say we’re disappointed in the announced deal between U.S. Steel and Nippon is an understatement, as it demonstrates the same greedy, shortsighted attitude that has guided U.S. Steel for far too long,” said union President David McCall in an news release. “Neither U.S. Steel nor Nippon reached out to our union regarding the deal, which is in itself a violation of our partnership agreement that requires U.S. Steel to notify us of a change in control or business conditions.”
This isn’t the first time Japanese steel makers have been involved with American steel companies or with U.S. Steel. In the 1980s, for instance, NKK Corp., a Japanese steel maker, bought a significant stake in National Steel. National filed for bankruptcy protection in 2002 and U.S. Steel purchased the assets for about $1 billion. National Steel’s assets in the Midwest have been part of U.S. Steel since.
Nippon is a top-five global producer of steel and about three to four times as large as U.S. Steel measured by revenues or by tons produced.
U.S. Steel was once the largest. Formed in 1901 and built by Andrew Carnegie and John Pierpont Morgan, U.S. Steel has been an icon of American industry. The company said in August that is was exploring strategic alternatives after receiving multiple unsolicited proposals.
The Nippon deal values U.S. Steel stock at about $12.3 billion and the entire company, including debt, at about $14.5 billion. That’s about 6.7 times the average earnings before interest, taxes, depreciation, and amortization, or Ebitda, generated over the past few years.
Average earnings are a typical way to value commodity-oriented businesses with cyclical earnings that vary significantly as commodity prices rise and fall.
Cleveland-Cliffs and
Nucor
both trade for about 7.5 times their average Ebitda generated over the past few years.
Write to Jack Denton at [email protected]
Read the full article here