Even as the Japanese steel giant’s shares fell more than 5%, Nippon Steel stated on Tuesday that it can afford to pay $14.9 billion for U.S. Steel (X.N), defending the enormous premium it proposed as having “sufficient economic rationale”.
The acquisition will increase the fourth-largest steel producer in the world’s capacity to produce 100 million metric tons of crude steel globally and expand its supply to the American auto industry.
“Nippon Steel aims to complete a global network… by establishing a base in the United States… where steel demand is expected to grow,” Eiji Hashimoto, president of the firm, stated during a press conference.
The Japanese steel behemoth sealed the deal on August 11 with a cash offer of $55 per share, a massive 142% premium above U.S. Steel’s share price on the final trading day prior to Cleveland-Cliffs announcing a $35 cash-and-stock proposal.
Without providing further details, Hashimoto responded that there was a “sufficient economic rationale” when asked how Nippon Steel could rationalise paying such a hefty premium.
The anticipated value of the synergies resulting from the transaction has not been provided by the company.
According to Japan expert Mark Chadwick, “this deal will propel Nippon Steel into the top 3 global makers of steel” on the research platform Smartkarma.
Nippon is paying what amounts to 7.3 times U.S. Steel’s 12-month earnings before interest, taxes, depreciation, and amortisation (EBITDA), according to LSEG data.
Following an abundance of sellers following the opening, Nippon Steel’s shares were untraded and sank 5.5% in early Tokyo trading.
In the aftermath of the transaction announcement, U.S. Steel shares closed Monday’s trading session up 26% at $49.59.
According to U.S. Steel’s annual report, about 25% of steel shipments out of its North American operations were to the automotive and transportation industries in 2022.
“The two combined will have a sizable chunk of the global auto market and look well placed to benefit from the shift to EV motors known as e-steel,” Chadwick stated.
“Even so, it is hard … to get excited given the looming costs to decarbonize the industry.”
Because Nippon Steel supplies steel for renewable energy infrastructure, such wind turbines, it is eligible for tax credits and other incentives offered by the U.S. Inflation Reduction Act (IRA).
