Investors should brace for volatile trading in steel stocks to start a new week. The steel company built by Andrew Carnegie and
J.P. Morgan
might not be independent for much longer.
United States Steel
(ticker: X), formed in 1901, announced Sunday it was exploring strategic alternatives after receiving “multiple unsolicited proposals.” Many organizations are looking to invest in or take over the steel maker.
“This decision follows the company receiving multiple unsolicited proposals that ranged from the acquisition of certain production assets to consideration for the whole Company,” said CEO David Burritt in a news release. “The Board is taking a measured approach to considering these proposals, including seeking more information in order to evaluate proposals that are preliminary and subject to ongoing due diligence and review.”
The stock soared in Monday trading, rising 27% to $28.89, its largest percentage increase on record. The
S&P 500
and
Dow Jones Industrial Average
were up 0.3% and 0.6%, respectively.
One of the proposals was from
Cleveland-Cliffs
(CLF), which was rejected. It announced Sunday a proposal to buy
U.S. Steel
for $17.50 a share and 1.023 shares of Cliffs’ stock. The proposal valued U.S. Steel stock at about $35 a share. U.S. Steel shares closed Friday at $22.72.
Cliffs stock was up 4.4% at $15.35 after being down in premarket trading. Large acquisitions that involve stock can often drive down the price of the acquirer’s shares early in the process.
“On July 28th I approached U.S. Steel’s CEO and Board with a written proposal to acquire U.S. Steel for a substantial premium, valuing the company at $35.00 per share with 50% cash and 50% stock,” said Cliff CEO Lourenco Goncalves in a news release. “U.S. Steel’s board of directors rejected our proposal, calling it unreasonable. As such, I believe it necessary to now make our proposal public to help expedite substantive engagement between our two companies.”
Goncalves has built Cliffs into the largest producer of flat-rolled steel in North America by acquiring AK Steel and the North American steel operations of
ArcelorMittal
(MT). Flat-rolled products become things such as car doors and filing cabinets. Long products are things such as structural beams and rebar.
In a separate statement, Burritt posted the rejection letter to Cleveland Cliffs, which said: “The Board has no choice but to reject your unreasonable proposal.”
KeyBanc analyst Philip Gibbs called the Cliffs proposal a strong offer adding, however, that the deal was a long shot. “Most glaringly, the proforma company would effectively control 100% of the U.S. iron ore market,” wrote Gibbs in a report. “Secondly, Cliffs is currently the largest supplier of automotive-grade steel in the USA, while U.S. Steel shipped greater than of its volumes to the auto/transportation market in 2022.” Regulators might not like that level of increased market concentration.
At $35 a share, the U.S. Steel enterprise, which includes stock and net debt, would be valued at very roughly $10 billion, or about $670 per ton of shipments. The U.S. Steel enterprise value was roughly $11 billion in March when steel prices were higher. Cliffs’ enterprise is valued at roughly $13 billion or $800 per shipped ton. Cliffs is worth a little more, but both companies have reported about $3.8 billion in earnings before interest, taxes, depreciation, and amortization, or Ebitda, a year on average for the past two years.
A U.S. Steel-Cliffs combination would create a company with roughly 30 million tons of shippable steel capacity with substantial iron ore and coal assets. That would be the largest in America, according to World Steel Association Data. Number two would be
Nucor
(NUE).
Nine of the largest 15 steel companies in the world are Chinese. China produces more than half of the 2.1 billion metric tons of steel produced annually around the globe. The U.S. produces roughly 100 million tons and is a net importer of finished steel products. Being a net importer means that the price of steel around the world typically sets the price U.S. producers are able to charge.
Consolidation in the domestic industry could help producers better match supply and demand and achieve higher profit margins.
Investors might welcome consolidation. Coming into the week, U.S. Steel stock is down about 9.3% this year and off about 10% over the past 12 months. Cliffs stock is down about 9% so far this year and off about 25% over the past 12 months.
Steel stocks have been battling falling steel prices. Benchmark steel prices enter the week at about $750 a ton after peaking at about $1,300 a ton in March. A year ago, steel prices were about $800 a ton.
Write to Al Root at allen.root@dowjones.com
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