Breakingviews: Some US Steel appeal would survive busted deal

Insufficient heat can interrupt the welding process, but U.S. Steel’s problem has been too much of it. Fiery nationalistic and labor backlash is preventing the 123-year-old company from fusing with Japanese peer Nippon Steel, as leery U.S. security regulators look set to nix the $15 billion deal. Although boss David Burritt may be forced to mold his metal-maker differently, there are ways to keep it relatively strong.

The fight over U.S. Steel offers a microcosm of an industry-wide one. More carbon-intensive blast furnaces produce steel of better quality. And even though, say, the smooth surfaces of car panels are tougher for newer electric arc furnaces, they’re catching up – and with better economics. At less than 10%, anticipated full-year EBITDA margins for U.S. Steel and blast-furnace rival Cleveland-Cliffs lag the 15% at more advanced Nucor and Steel Dynamics, according to Visible Alpha.

Electric now accounts for 68% of U.S. production, the World Steel Association says. U.S. Steel chased this shift, acquiring Big River Steel a few years ago, before plowing $3.4 billion into an expansion project dubbed BR2.

The problem: the investment incinerated free cash flow. U.S. Steel is expected to burn through more than $700 million of it this year, Visible Alpha estimates show. Steel prices surged through the pandemic, but they’ve receded again. Expectations for the company’s blast-furnace-segment EBITDA for 2024 have tumbled 35% since February. Some facilities sit idle, others need costly overhauls.

Small wonder that Burritt accepted Nippon’s $55-a-share offer in December. The price exceeds the mid-$20s where it formerly languished. It also hands over responsibility for a difficult strategic transition and a strained relationship with the United Steelworkers union representing blast-furnace employees. Non-union Big River ate up the capital once earmarked for unionized mills.

Nippon is making last-ditch efforts to salvage the transaction from being rejected by the Committee on Foreign Investment in the United States, which screens inbound takeovers. If it can’t, however, all is not lost for Burritt.

U.S. Steel’s metamorphosis holds immense promise despite likely job losses and other downsides from a deal collapse. Its electric business already produces superior margins to the rest of the company. Put the unit’s expected 2025 EBITDA on Nucor’s multiple of around 7 times and the rest on the 5 times at which Cleveland-Cliffs trades, and U.S. Steel is worth nearly $11 billion, including debt. It’s less than Nippon is willing to pay for control, but it’s also 11% higher than where it’s valued now. Big River also offers additional upside, an indication of fresh ways to strike when the iron is hot.