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U.S. Steel rejects $7.25B Cleveland

Aug 03, 2023

United States Steel Corp., one of the leading suppliers of steel products to the U.S. auto industry, has rejected a takeover offer from rival Cleveland-Cliffs Inc. that promised to create one of the world's biggest steelmakers, and will begin a review of its strategic options instead.

U.S. Steel, an icon of American industry with roots stretching back over a century, on Sunday announced a formal process to assess its alternatives after receiving approaches for parts or all of the business. About three hours later, Cliffs went public with its cash-and-share bid, which values the company at about $7.25 billion based on closing prices Friday, a 43% premium. U.S. Steel surged more than 29% Monday in New York. Cliffs jumped as much as 6.7%.

Both companies maintain a sizable presence in Southeast Michigan, though the amount of steel production in the state has declined significantly in recent years.

Cleveland-Cliffs said it submitted its proposal privately on July 28 and received a rejection letter Sunday, calling the offer "unreasonable." U.S. Steel (NYSE: X) later confirmed the response, but defended its decision saying Cliffs (NYSE: CLF) had refused to sign a non-disclosure agreement unless the Pittsburgh-based producer agreed to the economic terms of the proposal in advance.

U.S. Steel's Great Lakes Works operations in Ecorse and River Rouge contain finishing facilities for steels that are used primarily in the automotive industry. In 2019, U.S. Steel said it would indefinitely idle "a significant portion" of its Great Lakes Works facility and lay off 1,545 workers to end its primary steel making operations there.

Between its steel plant and Automotive Research & Technology Center in Troy, tU.S. Steel employs about 750 people in Michigan, according to a spokeswoman.

Cleveland-Cliffs operates Dearborn Works, with carbon steel melting, casting, cold-rolling and finishing operations for carbon steel, according to its website. In 2020, it idled its hot strip mill, anneal and temper operations there, terminating 343 employees.

The back-and-forth jousting was part of a whirlwind Sunday in which two of the biggest American steelmakers thrust the future makeup of the industry into question, just a week from the start of the biggest steel conference in North America.

The combined company would hold a powerful position as the primary supplier to the U.S. auto industry.

In 2022, U.S. Steel shipments to the automotive and transportation segments increased almost 10% to 3.25 million tons, its largest single business segment, the company said in an annual regulatory filing.

Cleveland-Cliffs said automotive customers made up 31% of its revenue in 2022, up from 25% in 2021.

A deal with U.S. Steel would catapult Cliffs into the ranks of the top producers globally, a list dominated by China.

A combined company also would own 100% of domestic iron ore reserves. It's an issue U.S. Steel addressed in its letter to Cliffs, saying it had discussed with Cliffs' counsel questions that both sides would need to better understand to assess antitrust risk in the proposal.

Cliffs Chief Executive Officer Lourenco Goncalves on Monday dismissed regulatory concerns and said he's confident the bid will succeed, citing the USW union support. There's "no daylight" between him and the union, Goncalves said on an interview with CNBC.

Cliffs, which was traditionally an iron ore miner rather than a steelmaker, has been the most active dealmaker in the U.S. industry in recent years — first snapping up AK Steel Holding Corp., and then buying the U.S. business of European steel giant ArcelorMittal. The purchases made Cliffs a key operator of traditional blast furnaces in the U.S., and gave it a massive foothold in the highly profitable business of steelmaking for the car industry.

The bid comes at a time when producers including U.S. Steel are predicting that domestic demand will benefit from green-energy infrastructure and manufacturing projects, bolstered by the Biden administration's Inflation Reduction Act.

It also shines a light on one of the key dynamics in the global steel industry: the divide between traditional blast-furnace production of steel from iron ore, and the more efficient, cost-effective and lower-emission plants that remelt scrap and turn it into steel, called electric-arc furnaces.

Goncalves, known for his combative personality and who never shies away from publicly stating his opinions, still has little footprint in electric-arc furnaces.

However, U.S. Steel, which traces its roots back to 1901 when J. Pierpont Morgan merged a collection of assets with Andrew Carnegie's Carnegie Steel Co., has undergone a dramatic shift in recent years under CEO David B. Burritt, as its investment focus pivoted toward the more modern plants.

Burritt, who took the helm of the then-struggling metal producer in 2017, purchased Big River Steel in Arkansas and expects to pour an additional $3 billion in the operation by 2024 to double its capacity. The bet has paid off, with shares of the company doubling since the end of 2019, although the stock had retreated 9.3% this year through last week. Cliffs had declined 8.8% in 2023.

Ohio-based Cliffs said Sunday that it offered to pay $17.50 in cash and 1.023 of its shares for each U.S. Steel stock. That implies a value of $32.53 per share as of Friday's close, a 43% premium to U.S. Steel's last closing price of $22.72 and values the company at about $7.25 billion.

"Although we are now public, I do look forward to continuing to engage with U.S. Steel on a potential transaction, as I am convinced that the value potential and competitiveness to come out of a combination of our two iconic American companies is exceptional," Goncalves said in the statement.

U.S. Steel has hired Barclays Capital Inc. and Goldman Sachs Group Inc. as financial advisers for its strategic review.

The steelmaker hasn't set a deadline for the review to be completed, and the process may not result in a transaction or any other strategic outcome, the company said in its statement.

Cliffs is being advised by Moelis & Company LLC, Wells Fargo, JPMorgan and UBS, and Davis Polk & Wardwell LLP is serving as its legal counsel.

— Automotive News contributed to this report.

Joe Deaux, Bloomberg Joe Deaux, Bloomberg

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