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US Steel: Nippon Steel Outbids Everyone
Wen Li, CFA - Head of Metals & Mining
Michael O'Brien - Analyst, Homebuilders
EXECUTIVE SUMMARY
- Nippon Steel (Baa2/BBB+) emerged victorious in the bid to acquire US Steel (B1/BB-/BB), significantly outbidding competitors such as CLF and MTNA.
- NIPSTL announced its agreement to purchase X in an all-cash transaction at $55 per share, which values the targeted company at an EV of $14.9 bn or 7.4x 2023E EBITDA.
- Reports indicate that NIPSTL intends to finance the equity portion of the acquisition with bank loans and the existing debt of X and BIGBRS will remain in place with US Steel operating as an indirect subsidiary of Nippon Steel, although it remains uncertain whether Nippon Steel will extend explicit guarantees to the existing debt.
- While the acquisition by NIPSTL is unlikely to raise antitrust concerns, the transaction between NIPSTL and X could still face regulatory challenges with the US government potentially raising concerns over a foreign company owning steel assets due to national security considerations.
- While the USW union has expressed discontent with the transaction, the current collective bargaining agreements will remain in effect post-acquisition, which limits the union’s ability to obstruct the deal in our view.
In a surprising turn of events, Nippon Steel (NIPSTL, Baa2/BBB+) emerged victorious in the bid to acquire US Steel (B1/BB-/BB), significantly outbidding competitors such as Cleveland-Cliffs (Ba3/BB-/BB-) and ArcelorMittal (Baa3/BBB-). NIPSTL announced its agreement to purchase X in an all-cash transaction at $55 per share, which values the targeted company at an EV of $14.9 bn or 7.4x 2023E EBITDA. The offer stands at a 40% premium over X’s stock price as of December 15th and a 69% premium compared to CLF’s previous bid of $32.53 per share in August. On a pro forma basis, the net leverage for the combined entity is estimated to be 3.1x, before accounting for any potential synergies. The transaction is anticipated to be finalized in either the second or third quarter of 2024, pending approval from US Steel’s shareholders and the receipt of necessary regulatory approvals.
FINANCING DETAILS
The M&A call offered scant details on the deal structure, but indications are that NIPSTL intends to finance the equity portion of the acquisition with bank loans. Meanwhile, the existing debt of X and BIGBRS will remain in place, with US Steel operating as an indirect subsidiary of Nippon Steel. Although US Steel’s assets and liabilities will be consolidated onto Nippon Steel’s balance sheet, it remains uncertain whether Nippon Steel will extend explicit guarantees to the existing debt held by X and BIGBRS. Should Nippon Steel decide against providing explicit guarantees, we believe the existing bonds for US Steel and BIGBRS will trade at levels more reflective of their standalone credit profiles. Nevertheless, the presence of an implicit guarantee from a substantial, investment-grade multinational parent company like Nippon Steel should offer additional support for the credit spreads of X and BIGBRS. In addition, we also do see the potential for existing debt to be refinanced at NIPSTL over time as well, which is also a positive for the X and BIGBRS structures.
STRATEGIC RATIONALE
Nippon Steel, Japan’s largest steelmaker with LTM revenues of $61.4 billion, LTM EBITDA of $7.7 billion, and a crude steel capacity of 66 mtpa (comprising 47 mtpa in Japan and 19 mtpa internationally) sees the acquisition aligning with its objectives to (1) boost its global steel capacity towards 100 mtpa, with the combined capacity reaching approximately 85-86 mtpa, and (2) increase its production of EAF-produced steel. The favorable financing conditions for the Japanese steel giant likely empowered it to surpass bids from steelmakers like CLF and MTNA. Additionally, Nippon and US Steel intend to exchange technological insights, which promises synergies over the longer term.
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