Yahoo Finance Buyout offers knock on US Steel's door as 'glory days' fade
One of the US economy's most revered manufacturing names could soon be absorbed by the industry.
US Steel (X) this week revealed the company is evaluating "strategic alternatives" after receiving "multiple unsolicited offers," including a $7.3 billion bid from peer Cleveland-Cliffs (CLF), which it rejected.
US Steel also received a bid from privately-held Esmark worth $7.8 billion with European giant ArcelorMittal (MT) is also reportedly interested in the company, a deal which would mark a re-entry to the US market after ArcelorMittal sold its US assets to Cleveland-Cliffs in 2020.
Following Cleveland-Cliffs' offer, US Steel stock rose more than 35% bringing its year-to-date gains to just shy of 25%. Cleveland-Cliffs shares are down about 7% this year, in-line with the drop seen in US Steel shares prior to its bid for the company.
The bids also come with steel prices more than 50% off their pandemic highs.
"We've just seen the glory days happen," said Josh Spoores, steel analyst at CRU Group. "It was two years after the pandemic lockdowns happened where [steel companies] made an incredible amount of money. We're trending back down towards more normalized levels now."
US Steel's annual revenue grew from $12.93 billion in 2019 to $21.06 billion in 2022, when the the price of the underlying commodity reached a record of almost $2000 per ton during the pandemic.
This year, analysts expect sales to decline about 15% in 2023 and 13% in 2024, with adjusted earnings falling 61% and 50% respectively, according to Bloomberg data. Total steel shipments are estimated to grow 1.19% this year, and 4.11% in 2024.
A manufacturing 'renaissance'
Founded in 1901, the Pittsburgh-based giant has been a player in traditional steel production using blast furnaces. More recently, the company has invested in electric arc furnaces, which provide a cleaner, more cost efficient way to produce steel by recycling scraps.
"They've [US Steel] been investing in some key new facilities. And as they prepare to pay for new equipment in their facilities they've been carrying a lot of cash on their balance sheet," Spoores said.
"Overall I think they’re in a great position to serve the North American steel market in the decades to come because of what they’re doing," he added.
Though the US is decades past its peak steel-making days, a tie-up between US Steel and Cleveland Cliffs would rank them as the only American company among the top 10 steelmakers in the world.
Domestically, the industry is expected to benefit from the government's multi-year spending initiatives on infrastructure, manufacturing, and green energy developments through the Inflation Reduction Act passed last year.
"I'd say the IRA is misnamed," US Steel CEO David Burritt said during the company's second quarter earnings call. "It's a Manufacturing Renaissance Act. We applaud those that made it happen, and we look forward to the tailwinds we believe it will provide for the steel industry for years to come."
One industry analyst called the spending "an unprecedented perfect storm."
"All of those things could potentially result in a big boon for the steel industry," Evan Mann, senior high-yield analyst at Gimme Credit told Yahoo Finance.
"I think they're positioning themselves for that. Rightsize the industry. Get rid of the inefficient capacity, so that when demand picks up, you're ensuring that pricing will be better and everybody in the industry will make more money," he added.
Regulatory hurdles
Industry observers also expect that a tie-up between two US steel giants would likely come with regulatory hurdles.
An acquisition of US Steel by Cleveland-Cliffs, for instance, would make the combined company the only provider of iron ore used for blast furnace production in the US.
"When you have continued consolidation within the supply, my biggest concern is that it will lead to increased supply price pressures that will make it harder for domestic manufacturers to compete," said Dale Crawford, executive director at Steel Tube Institute, a non-profit that represents manufacturers of steel tubing used in everything from warehouses to electrical infrastructures.
Another regulatory eyebrow raiser could come from the electrical steel market, with this material used for EV parts such as motors and charging infrastructure.
Cleveland-Cliffs is the main producer of that material in the US, and US Steel is working on a new line to provide the same product domestically.
"I'm so confident in our ability to be not only successful but disruptive to the electrical steel market in the United States," Burritt said during the company's last earnings call. US Steel sees the electrical steel market as one of the fastest-growing with margin expansion potential.
"Here, again, you have a competitive move — that the other company is just trying to purchase [US Steel] to eliminate," said Spoores. "This would have a very, very challenging time to pass through antitrust investigations. Something would need to be divested, or many things would need to be divested."
An 'unreasonable' offer
Though other bidders have reportedly emerged, the central playing in an American steel industry reshuffling — US Steel and Cleveland Cliffs — don't seem particularly close on a framework to get a deal done.
US Steel's chief executive Burritt called Cleveland-Cliffs' offer "unreasonable" in a letter addressed to its CEO, Lourenco Gonclaves. Cleveland Cliffs, however, is not walking away from the negotiating table.
Cleveland-Cliffs now has the industry union on its side, with the the United Steelworkers announcing Thursday Cleveland-Cliffs has the right to bid on its behalf since an acquisition would require the support of USW.
"We have no doubt that the extension of our strong partnership with Cliffs to the 11,000 union represented employyes at USS will benefit the employees, their families and the communities in which they operate," wrote USW president Thomas Conway in a letter earlier this month. "A strong and productive U.S. labor force is of utmost importance to our country."
"With this exclusive assignment, Cliffs is the only realistic buyer able to acquire the totality of U.S. Steel," the company said in a statement on Thursday.
"I'm sure the offers are going to become a little more competitive, more higher valuation before its all said and done," Spoores said.
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.
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