US Steel (USS) must name its potential buyers, Cleveland-Cliffs said in a filing with the US Securities and Exchange Commission (SEC) on Tuesday August 22, escalating a very public disagreement between the two integrated steelmakers.
In a letter addressed to US Steel’s president and chief executive officer David B Burritt, Cliffs chairman, president and chief executive officer Lourenco Goncalves called for the Pittsburgh-based steelmaker to disclose who Cliffs’ bidding competitors are.
“USS must immediately either a provide Cliffs and the USW with the required notice of all proposals that have already been received or… if USS has not in fact received any proposals, correct its prior public statements and acknowledge that no such proposals have in fact been received,” Goncalves wrote.
Also copied on the letter were Duane Holloway, who serves as senior vice president, general counsel, and chief ethics and compliance officer at US Steel, and Thomas Conway, international president of the United Steelworkers union (USW).
Mixed industry sentiment
Industry participants had mixed views about the impact of Cleveland-Cliffs buying out US Steel, either in parts or as a whole.
“Will the government allow only three steel companies?” a producer asked, noting that “it is very difficult to buy a publicly traded company if they do not want to be bought.”
The producer source also noted that the legacy of US Steel stretches back into the nation’s steelmaking history.
“US Steel is not just Big River Steel – it has Mon Valley, Gary Works, etc – these are huge legacy sites,” the producer said.
“There will be antitrust issues if Cliffs buys US Steel because the new entity would control 80% of the auto steel supply,” a steel distributor said, echoing fears about a super-concentration of automotive-grade steel supply and whether auto original equipment manufacturers would allow that to happen.
The potential deal has “too many monopolistic factors… I have a feeling the regulatory hurdles are going to be a lot more complex and time-consuming than Goncalves said in his release,” a second distributor said, adding: “I would imagine [Goncalves] would indeed drive the [flat-rolled steel] pricing up.”
Others in the industry cheered the potential for greater synergies and efficiency between the last two integrated behemoths.
There are idled capacities under both Cliffs and US Steel; after the acquisition, they may shut down some of the old mills
“There are idled capacities under both Cliffs and US Steel; after the acquisition, they may shut down some of the old mills,” a trader said. “There will be more consolidation in the flat-rolled side.”
The deal could result in “more discipline; it will stabilize the prices, and then it will go up,” the trader continued. “The United States has a capacity-utilization problem; they are running inefficient mills. Demand is good, so when they streamline the mills, it will be good for the industry overall.”
And according to Cleveland-Cliffs, the acquisition of US Steel would create $500 million in operating synergies.
A second trader said that “Cliffs makes the most sense, as it has the most synergies to offer.”
Sources also indicated that ArcelorMittal might be interested in re-entering the US steel market after selling the bulk of its assets in the country to Cliffs in 2020.
“ArcelorMittal will want to get back into the US market because they had sold off their assets and now their presence is only in Calvert,” the second trader said, referring to AM/NS Calvert, an Alabama-based flat-roll mill and processing plant jointly owned with Nippon Steel.
ArcelorMittal’s “return to the Midwest would make the most sense for the industry,” the second distributor said.
The second trader said he hoped that “US Steel is sold as a whole, though, not for parts,” adding: “I cannot imagine someone bidding for the smaller assets; Big River Steel is the prized possession; ArcelorMittal will want that technology, so will Cliffs.”
Potential antitrust hurdles
This potential acquisition – which would create the largest steelmaker in the country and catapult Cleveland-Cliffs to become the 10th largest in the world – will likely stoke antitrust concerns that generally involve the interest of two US agencies: the Federal Trade Commission (FTC) and the Department of Justice (DOJ).
“There are two organizations in the US that would potentially be concerned about some kind of monopoly power in an industry: the FTC and the DOJ,” Tom Dunlap, managing partner at Dunlap, Bennett & Ludwig, told Fastmarkets on August 22. Both agencies are likely to play a big role in the negotiations if discussions move forward, sources said.
“There’s no way DOJ sleeps on this,” Christopher Macchiaroli, partner at Silverman Thomspon, told Fastmarkets on August 22. “The DOJ is going to be involved and will try to stop the merger if there’s any agreement. There is no doubt in my mind that that will happen. This is on their radar now, and they’re just waiting to see if there’s any kind of agreement to be had, but there’s no way that DOJ does not intervene and try to stop it.”
“The FTC is going to weigh in; and if it moves forward, it’s going to be a negotiated resolution,” Reuben Guttman, partner at Guttman, Buschner & Brooks PLLC, told Fastmarkets on Monday August 21. “The union is going to be significant in addressing any antitrust issues that the FTC may have.”
To circumvent US antitrust regulations, it is possible that US Steel’s business segments would be broken up and sold in parts, the sources said.
“It’s possible that the regulators are going to require that certain components of [US Steel] be spun off,” Guttman said.
Dunlap echoed this sentiment, saying “it is absolutely possible” for Cleveland-Cliffs to circumvent antitrust regulations by splitting US Steel up.
“It’s also possible that they do it in conjunction after talking to the government, or they’re already planning to do it just to avoid any antitrust questions; that could all be happening in the background,” he said.
“The union is going to weigh in on that,” Guttman said, citing concerns about whether “they are spun off to entities that are not going to honor the union agreements or it’s going to impact the union agreement adversely… It’s going to require bargaining over whether the union agreement still exists.”
Macchiaroli, however, said that he does not see this merger being approved even if US Steel was split up.
“I see this more as the regulator not approving the merger, even under breaking it [USS] up,” Macchiaroli said. “I also don’t see [US Steel] wanting to break it up to go forward with it either.”
A ‘three-way negotiation’ with USS, Cliffs and USW
The fact that Goncalves has the support of the US Steel’s labor union might tip the odds in his favor, several market watchers said.
“For whatever reason, the United Steelworkers believes that a Cleveland-Cliffs suitor is a more union-friendly suitor, and that makes that makes all the difference in the world,” Guttman said.
On August 3, the union affirmed in a letter – that was later shared by Cleveland-Cliffs –that it supported the proposed acquisition, would not exercise its right of a counteroffer and would not endorse anyone other than Cleveland-Cliffs for such a transaction. Highlighting the importance of the union in the negotiations between US Steel and Cliffs, Guttman – who specializes in labor issues – said that he anticipates a “three-way negotiation” with regards to antitrust implications.
“[The workers] have the ability to say: ‘We like this management, we like this deal, we’ll go along with it,’” Macchiaroli said.
But Cliffs’ letter to US Steel, which was included in an 8-K filing with the SEC on August 22, came after USS published a letter earlier on Tuesday noting that its existing basic labor agreement “does not grant the USW, or any party it assigns its rights to, the right to prevent a potential transaction – with any party – that our board decides is in the best interest of our stockholders.”
That letter, which was addressed “Dear Colleague,” concluded by saying: “Please continue to focus on what you can control. Together, we are building our Best for All future.”
Macchiaroli agreed that “technically, the union can’t legally have rights and block something, but they can all be 100% involved in the acquisition.”
“The union are still the people that actually vote; they still ultimately have the power because they’re showing up for jobs,” he said. “They are making sure things are productive. If you keep them happy, business runs and you’re not going to have any interruptions.”
The fact that the union’s preference regarding a once-in-a-lifetime deal has received so much consideration exemplifies the “resurgence of labor” in the United States, Guttman said, noting: “This is a very good situation for the steelworkers union.”
Cleveland-Cliffs had made a $7.3-billion cash-and-stock offer for US Steel on July 28, but it was rejected after the two companies could not agree on the terms of a mutual nondisclosure agreement.
In rejecting the offer, US Steel said it had also received “multiple other offers,” prompting the company to commence “a comprehensive and thorough review of alternatives,” ranging from a complete buyout to the acquisition of certain production assets, the legacy steelmaker’s CEO announced on August 13.
Pennsylvania-based industrial conglomerate Esmark announced an all-cash bid for US Steel on August 14; that news was followed by anonymous reports on August 16 that Luxembourg-based ArcelorMittal SA was also considering a bid.
Article available here: https://www.fastmarkets.com/insights/cleveland-cliffs-uss-deal-steel-market