US Steel jumped 26% early Monday in stock market action on news that the steelmaker had rejected a $7.3 billion bid from Cleveland-Cliffs that would create the largest US steel producer.
Cleveland-Cliffs announced its takeover bid Sunday after US Steel rejected the offer, citing insufficient disclosure. US Steel has not closed the door on a deal, while saying it has received alternative bids for “certain production assets” in addition to the purchase offer.
Cleveland-Cliffs offered $17.50 a share in cash, plus 1,023 CLF shares, adding up to $35 per share. That represents a 43% premium to X’s closing price of $22.72 on Friday.
Regulatory Risks of the CLF-X Transaction
In a note Monday, KeyBanc analyst Philip Gibbs called the offer “more than fair,” but added that he expected “meaningful concessions” would be needed to secure regulatory approval. Among the hurdles: The X-CLF formulation would create a monopoly in the US iron ore market.
Gibbs also points out that both Cleveland Cliffs and US Steel are major suppliers to the auto industry.
However, City analyst Alexander Hacking called the offer “opportunistic”. He sees US Steel’s long-term value closer to $46 a share. The hack also expects government regulators to “take a long, hard look.”
For its part, Cleveland Cliffs said it expects regulatory approval “in due course.” The company also promoted United Steelworkers’ union endorsement of the deal, citing CLF’s track record after other acquisitions.
CLF Cash would “de-risk” X CAPEX
CLF and X stock have both been lagging behind the stock market for the past two years. But the Cleveland-Cliffs have shifted its balance sheet, reducing debt even as it returns money to shareholders via buybacks.
“Unlike many of our competitors, our capital needs – both now and in the next few years – are known and low,” CEO Lourenco Goncalves said in a second-quarter earnings release last month.
Cleveland-Cliffs is now hoping to put some of its money into a transformational deal, which it says will “de-risk” US Steel’s more difficult capital spending plans.
Cleveland-Cliffs and US Steel together will ship 25.9 million tons of steel, overtaking Nucor, by 18.2 million tons. However, CLF-X will only be the tenth steel producer globally.
X stock rose 6.09 to 28.81, while CLF stock rose 0.7% to 14.79 early Monday. Meanwhile, Nucor rose 1.8% and Steel Dynamics rose 0.7%, buoyed by hopes that industry consolidation will improve supply discipline, which is positive for steel prices.
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