Nippon Steel investors begin to count cost of US Steel acquisition

SINGAPORE – After a year and a half of government talks, countless regulatory hiccups and last-minute negotiations, Nippon Steel secured its much-wanted prize late last week when US President Donald Trump approved the US$14.1 billion (S$18 billion) purchase of US Steel.

Now the Japanese giant’s shareholders will begin to weigh the benefits of its biggest ever overseas bet. They will also be keeping a watchful eye on the costs, which include a promise to invest US$14 billion over the coming years and significant concessions to the US government that will leave Washington with a say in major decisions and control over some board seats.

The first concern will be financing, necessary to fund the all-cash acquisition and the promised investments, which range from upgrades to existing plants to a new steel mill – and how to do that while limiting the dilution of existing shareholders if new equity is issued.

Even before the political complications, the price looks steep. At US$55 a share, Nippon Steel is paying a 142 per cent premium to the level US Steel was trading at before it effectively put itself up for sale in 2023.

Given US Steel’s “sluggish” earnings, it will now be vital for Nippon Steel to demonstrate early returns on investment, SMBC Nikko analysts said in late May.

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.

The last-minute victory for Nippon Steel has come against all odds. In January, it faced opposition from then President Joe Biden, and also from Mr Trump, who criticised foreign ownership of an American industrial icon.

In May, however, Mr Trump began touting the takeover as a “partnership” that will keep US Steel an American company and receive billions in investments.

On June 13, he formally opened the door to approving the sale of US Steel by submitting the agreement to the companies and amending Mr 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 speciality steel – one that is intended to help the industrial heavyweight diversify away from shrinking demand at home and 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, which for a generation has dominated the American steel industry.

The acquisition also clears the way for enhanced steelmaking in areas in which the US has lagged behind in recent years, including the type of steel critical to bolster ailing electricity grids across the country.

Mr Trump has 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. BLOOMBERG