Nippon Steel's aggressive bid for US Steel signals better time ahead for the sector 

Steel

Highlights

• Japanese steel giant Nippon has announced plans to buy US Steel in a deal worth $14.9 billion  
• The purchase would create one of the world's biggest steel companies outside of China  
• The acquisition is aggressively priced at a 40 percent premium to the market price and more than double the last bid 
• As the largest steel importer and an expanding market, the acquisition in the United States is logical 

US Steel, established in 1901 by business magnates Andrew Carnegie and JP Morgan, has been acquired by the Japanese steel giant Nippon Steel. US Steel, a key player in driving US industrial expansion, was once one of the world's largest companies during its prime.

While the sale of US Steel wasn't unexpected, given that it has been on the block for a while, the assertive pricing strategy in the transaction took the market by surprise. Nippon Steel acquired the company at $55 per share, resulting in a total enterprise value of $14.9 billion. This purchase price represented a premium of 40 percent over the prevailing market value. In contrast, US-based Cleveland Cliffs made an offer at an enterprise value of $7 billion in August.

Nippon's acquisition of US Steel at more than double the nearest competing bid underscores the strategic importance of US Steel in Nippon's growth plan. Beyond China, the combined production capacity of Nippon and US Steel will make it the largest globally.

The aggressive acquisition of US Steel can be deciphered by observing Nippon's strategic empire-building, considering prevailing market conditions and the rising costs of raw materials.

In the wake of the Chinese economic slowdown, Japanese and Korean steel companies have sought new markets, with the US and Europe emerging as significant targets. However, heightened competition in the steel industry prompted the US and Europe to safeguard their domestic sectors by imposing higher import duties.

The United States market, the largest steel importer with approximately 31 million tonnes imported in 2022, aligns seamlessly with Nippon's expansion blueprint. Nippon aspires to achieve a production capacity of 100 million tonnes, with 60 percent originating outside Japan.

The present capacity of Nippon is 66 million tonnes, including 19 million tonnes from foreign subsidiaries and joint ventures. The acquisition of US Steel will take the combined capacity to 85 million tonnes.

The Japanese steel company has tripled its international capacity over the past decade. US Steel's 20 million tonnes will double Nippon's capacity in foreign destinations, bringing it closer to its target of achieving 100 million tonnes.

In its communication document, Nippon mentioned that its strategy is to acquire integrated steel mills through acquisitions and capital participation (brownfield investment) and expand existing capacity.

Nippon has a good understanding of the US market with its presence in the country for the last 40 years. It has whole or majority ownership in eight units in the US with a labour force of 4,000. US Steel will add another 22,000 to its workforce (including 14,000 in the US).

US Steel fits the company's growth plan as the US market is big enough to absorb current and future expansions. With a focus on infrastructure and growth of the automobile sector, steel consumption in the US is expected to rise by 1.3 percent in 2023 and 2.5 percent in 2024 after falling by 2.20 per cent in 2022.

Nippon says the US market is attractive because it isn't especially reliant on exports, has a growing population, and has a high demand for high-grade steel.

Proximity to low-cost natural gas (Shale gas) makes the acquisition attractive. To top it all, access to low-cost funds from Japan, which still has very low interest rates, will sweeten the deal for Nippon Steel.

Further, besides the acquisition of steel units across the globe, including Essar Steel in India, Nippon has been strategically investing in raw materials by acquiring coal and iron ore assets globally. Being self-reliant helps keep the cost of production low and survive a down-cycle.

As for the valuation, Nippon is paying around 7.3 times US Steel's 12-month earnings before interest, taxes, depreciation and amortization (EBITDA), which is close to the median in the steelmaking industry. Though the company is not performing well currently, a focused management with access to low-cost funds and raw materials can turn it around quickly.