Breakingviews: US Steel tug-of-war threatens to pull it apart

Efforts to “save” United States Steel may rip it apart. An agreed $14 billion acquisition by Japan’s Nippon Steel slammed into political opposition, with U.S. President Joe Biden declaring it “vital” the centenarian company remain “domestically owned and operated.” A sale to hostile suitor Cleveland-Cliffs or a standalone U.S. Steel seem equally intolerable.

The transaction unveiled in December riled unionized U.S. Steel employees, an influential constituency ahead of a presidential election. Their displeasure also looms large as the inscrutable Committee on Foreign Investments in the United States reviews the deal. The U.S. Treasury-chaired agency sends recommendations to the Oval Office; Biden’s intervention portends an unfavorable judgment.

Fundamentally, the dispute hinges on antiquated blast furnaces. U.S. Steel became vulnerable to a takeover largely because it has spent heavily on lower-emission electric arc alternatives, hurting returns in the meantime. The target’s financial projections foresaw EBITDA declining after 2026, even as it expects new electric facilities to deliver an extra $1 billion of such profit. These prospects understandably concern United Steelworkers members who stand to lose their jobs as old furnaces close.

The Japanese suitor is promising to invest $1.4 billion to upgrade U.S. Steel factories. And although CFIUS has a 90-day clock, deal participants can withdraw and refile, stretching out the timeline. Whether Nippon could delay until after Americans vote in November and political fever potentially cools is unclear.

There’s another option: sell U.S. Steel’s blast furnaces to Cleveland-Cliffs. This solution would nullify the sticky antitrust problem involving electric steel for battery-powered cars, a market the two companies dominate. Overall automotive steel would remain an issue alongside determining who gets U.S. Steel’s iron-ore production, but those challenges might be more surmountable. As a guide for valuation, one unnamed group offered to buy most of U.S. Steel’s legacy assets for $3.4 billion while Nippon said it would pay $9.2 billion for the electric furnaces and a mine, according to deal documents. The combined price tag represents a premium to where U.S. Steel shares had been trading, but less of one than Nippon is paying for everything.

Without a new owner, the future of U.S. Steel’s blast furnaces may be grim. The company’s shares are hovering around $39, a 29% discount to Nippon’s offer, implying roughly one-in-three odds of the sale succeeding. U.S. Steel maintains it expects to complete the transaction this year, but such confidence isn’t shared widely enough to avoid taking other options seriously.