After a year and a half of government talks, countless regulatory hiccups and last-minute negotiations, Nippon Steel Corp. secured its much-wanted prize late last week when President Donald Trump approved the $14.1 billion purchase of United States Steel Corp.
Now the Japanese giant’s shareholders will begin to weigh up the benefits of its biggest ever overseas bet. But they’ll also be keeping a watchful eye on the costs, which include the promise to invest $14 billion over the coming years and significant concessions to the US government, which will hold a so-called “golden share” that leaves Washington with a say in major decisions and control over some board seats.
Shares of Nippon Steel rose as much as 5% early on Monday, the most in over two weeks, before paring gains to trade up 2.4% in the early afternoon in Tokyo. The company’s credit default swaps, a gauge of perceived credit risk, were indicated wider at around 87 basis points, compared to 83 bps on Friday.
“There are both positive and negative aspects to this Nippon Steel deal,” said Taku Sugawara, an analyst at Iwai Cosmo Securities Co. “If the focus is more on the potential dilution, then the news could be interpreted negatively. On the other hand, if the focus shifts to the fact that the deal has been successfully finalized, it could be seen in a more positive light, especially if there’s a strong belief in the future benefits of the acquisition.”
For the Japanese steelmaker’s investors, a key short-term concern will be its financing plans for both the all-cash acquisition and the promised investments, which have increased significantly over the months of negotiations and now range from upgrades to existing plants to a new steel mill.
“For now, the main concerns are the size of the investment, how it will be financed, and over what period the investment will be recouped, all of which remain vague,” said Ryunosuke Shibata, an analyst at SBI Securities Co. “It’s hard to imagine the entire amount being financed through debt, especially since such interest-bearing liabilities would impact credit ratings and US interest rates are still in the 4–5% range. I believe Nippon Steel has to issue new shares.”
He added that the company could seek to raise as much as 1 trillion yen ($6.9 billion) in capital markets.
Even before the political complications that have hampered Nippon Steel’s US gambit, the offer price looked steep. At $55 a share, Nippon Steel will pay a 142% premium to the level US Steel was trading at before it effectively put itself up for sale in 2023.
Some investors have already raised concerns. Singapore-based 3D Investment Partners has urged other shareholders in Nippon Steel to vote against reappointing its president and vice chairman, both of whom have championed a drawn-out US takeover that the fund argues threatens “irreversible” value destruction.
Against All Odds
The last-minute victory for Nippon Steel has come against all odds. In January, it faced opposition from the then-president, Joe Biden, and also from Trump, who criticized foreign ownership of an American industrial icon. Last month, however, he began touting the takeover as a “partnership” that will keep US Steel an American company and receive billions in investments.
On Friday, Trump formally opened the door to approving the sale of US Steel by submitting the agreement to the companies and amending Biden’s move to block the agreement in an executive order.
For Nippon Steel, its biggest foreign purchase to date is a bet on a new market for its high-end specialty steel — one that is intended to help the industrial heavyweight diversify away from shrinking demand at home and to help it cope with competition from low-cost Chinese exports.
The deal creates a combined company that will be the world’s second-largest steelmaker. It will become a formidable domestic competitor to Nucor Corp., which for a generation has dominated the American steel industry. The acquisition also clears the way for enhanced steelmaking in areas the US has lagged in recent years, including the type of steel critical to bolster ailing electric grids across the country.
Trump has also hailed the accord as vindication of his trade policies, which have seen the administration inflict tariffs in a bid to pressure companies to shift more manufacturing to the US. Japan has been engaging in negotiations with the US over trade in a bid to avoid higher levies. The president’s decision to champion Nippon Steel’s bid could provide fresh momentum for those talks.
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