US Steel Cleveland Cliffs

US Steel Shares Surge Post-Declined Cleveland Cliffs Bid

United States Steel Corp. experienced a surge in premarket trading following its decision to decline a takeover offer from rival Cleveland-Cliffs Inc., a move that would have created one of the world’s largest steelmakers. Instead, US Steel has opted to initiate a comprehensive review of its strategic options.

US Steel, an enduring emblem of American industrial prowess with a legacy dating back over a century, announced on Sunday its intent to explore alternatives after receiving inquiries concerning various segments of its business. The announcement prompted Cleveland-Cliffs to publicly disclose its cash-and-share proposal, which carries a value of approximately $7.25 billion based on Friday’s closing prices, representing a 43% premium.

In response to the proposal, US Steel experienced a notable upswing, surging by as much as 29% in New York on Monday, reaching its highest point since March 8. Cleveland-Cliffs also saw a moderate increase, trading as much as 3.1% higher.

Cleveland-Cliffs revealed that it had privately submitted the proposal to US Steel on July 28 and subsequently received a rejection letter, deeming the offer “unreasonable.” US Steel confirmed the rejection, while also asserting that Cleveland-Cliffs had attached certain economic terms to the proposal before agreeing to sign a non-disclosure agreement.

The series of exchanges unfolded on a dynamic Sunday, punctuating the lead-up to the largest steel conference in North America.

Had a deal materialized, it would have catapulted Cleveland-Cliffs into the upper echelons of global steel producers, rivalling even the titans of China. The combined entity would have wielded considerable influence as a primary supplier to the US automotive industry and held 100% ownership of domestic iron ore reserves. US Steel articulated concerns about the potential antitrust implications of the proposal, indicating the necessity for further discussions to ascertain the associated risks.

Cleveland-Cliffs, originally an iron ore miner, expanded its reach in recent years through strategic acquisitions, including the purchase of AK Steel Holding Corp. and the US business of European steel giant ArcelorMittal. These acquisitions propelled Cleveland-Cliffs into a pivotal role within the traditional blast furnace segment of the US steel industry and significantly bolstered its involvement in steel production for the automobile sector.

The proposal emerges against a backdrop of bullish forecasts for domestic steel demand, fueled by green-energy infrastructure and manufacturing initiatives, supported by the Biden administration’s Inflation Reduction Act.

The tug-of-war between traditional blast-furnace steel production and more efficient, eco-friendly electric-arc furnaces comes to the fore in this scenario. While Cleveland-Cliffs’ CEO Lourenco Goncalves has a limited footprint in electric-arc furnaces, US Steel, under the leadership of CEO David B. Burritt, has undergone a strategic transformation towards modernization.

US Steel’s recent acquisition of Big River Steel in Arkansas and substantial investments to double its capacity underscore this shift in focus. The endeavor has borne fruit, as evidenced by the doubling of the company’s shares since the end of 2019, despite a 9.3% retreat this year until last week. Cleveland-Cliffs, on the other hand, saw an 8.8% decline in 2023.

Cleveland-Cliffs’ proposal comprised a cash component of $17.50 and 1.023 of its shares for each US Steel stock, valuing the latter at approximately $32.53 per share based on Friday’s closing prices. Despite the rejection, Goncalves expressed optimism regarding the value and potential competitiveness that a merger of the two iconic American companies could offer.

US Steel has enlisted Barclays Capital Inc. and Goldman Sachs Group Inc. as financial advisers for its strategic review, which lacks a set completion deadline and may not culminate in a transaction or other strategic outcome, as per the company’s statement. Cleveland-Cliffs is receiving counsel from Moelis & Company LLC, Wells Fargo, JPMorgan, and UBS, with Davis Polk & Wardwell LLP serving as its legal advisor.

United States Steel Corporation: 28.99 USD +6.28 (27.65%)today

Source: Bloomberg

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