On Dec. 18, 2023, Iconic steel producer United States Steel Inc. (NYSE: X) announced it had agreed to be acquired by Japan’s largest steel maker, Nippon Steel Co. (OTCMKTS: NPSCY), in an all-cash deal at $55 per share. Nippon would pay a total of approximately $14.9 billion to acquire the company and assume its debt. The $55 per share takeover price represented a 40% premium to where U.S. Steel shares were trading preceding the announcement. The deal would make Nippon Steel the world's fifth-largest steel maker.
Shockwave
This sent shares of all steel makers in the basic materials sector higher in sympathy, gapping up stocks like Cleveland-Cliffs Inc. (NYSE: CLF), Steel Dynamics Inc. (NASDAQ: STLD), Nucor Co. (NYSE: NUE) and Olympic Steel Inc. (NASDAQ: ZEUS). Steel stocks rose due to speculation of further industry consolidation and a price multiple expansion of the industry based on the impressive premium offered for U.S. Steel. This begs the question, who is next to be acquired?
Steel industry consolidation
The steel industry is no stranger to consolidation. In 2006, Indian-owned Mittal Steel acquired West European-owned Arcelor to form ArcelorMittal in a hostile takeover to become the world’s largest steel producer. In 2020, Cleveland-Cliffs acquired AK Steel Holding Co. for $1.1 billion in a stock swap to form the largest U.S. flat-rolled steel producer.
Leading up to the merger
In August 2023, Cleveland-Cliffs made a $7.3 billion offer ($33 per share in cash and stock) to acquire U.S. Steel, which was publicly rejected. It was rumored that U.S. Steel had multiple bidders leading up to the announcement, which included many peers, Nucor, Steel Dynamics, ArcelorMittal, POSCO, and Baosteel.
Opposition
While Nippon Steel won the bid, it still requires shareholder approval and an even larger hurdle with the U.S. government. It is already seeing resistance from the United Steelworkers union and bipartisan resistance in Congress citing national security concerns. A bipartisan coalition of U.S. senators sent a letter to Janet Yellen, U.S. Treasury Security and Chairperson of the Committee on Foreign Investments in the U.S. (CFIUS), to block the acquisition of U.S. Steel under Section 232 tariffs on foreign steel.
U.S. security concerns
A report suggests that a long and rigorous regulatory review by the CFIUS could delay or even torpedo the deal. Pennsylvania senator John Fetterman called the deal "outrageous" and vowed to block the transaction, "Steel is always about security. Both our national security and the economic security of our steel communities. I am committed to doing anything I can do, using my platform and my position, to block this foreign." Check out the sector heatmap on MarketBeat.
Cleveland-Cliffs reaction
While Cleveland-Cliffs was also involved in the current round of negotiations with a rumored offer for U.S. Steel above $40, the company fell short. In reaction to the U.S. Steel buyout, Cleveland-Cliffs CEO Lourenco Goncalves congratulated the U.S. and wished them luck.
Goncalves followed up by stating, “As we have been guiding, we have already reached our net debt target of $3.0 billion this quarter, with no borrowings on our ABL as of today. Given that our CLF shares are still significantly undervalued, we will now re-focus our capital allocation priorities towards more aggressive share buybacks under our existing share repurchase authorization.” This reassured shareholders that the company was going to continue to grow shareholder value with more aggressive buyback and financial performance.
Raising steel prices after the UAW strikes.
Cleveland Cliffs expected strong demand for flat-rolled steel, especially as automakers resumed production after the labor strikes. This caused steel deliveries to stutter in Q3 2023, but they should see demand pressure in Q4 2023. The company even raised its prices for hot-rolled, cold-rolled rolled and coated steel productions. Its minimum base price for hot rolled steel was raised to $1,100 per net ton on Dec. 6, 2023. The company has also undergone cost reduction initiatives, which led to lower full-year 2023 capital expenditures to $670 million, down from $700 million.
Cleveland-Cliffs analyst ratings and price targets are at MarketBeat. Cleveland Cliff's peers and competitor stocks can be found with the MarketBeat stock screener. Cleveland Cliffs stock has an 8.39% short interest.
Weekly cup pattern
The weekly candlestick chart for CLF illustrates the cup pattern. The cup lip line formed at the $22.83 peak in February 2023. Shares fell to a low of $13.61 by the end of May 2023 before forming a market structure low (MSL) trigger at $16.35. CLF formed a rounding bottom until it broke out higher through the daily 200-period moving average, trigging the MSL breakout in October 2023. Share continued to rise through $20.30 on the X acquisition announcement as the weekly relative strength index (RSI) rose toward the overbought 70-band. Pullback supports are at $18.77, $17.00, $16.35 weekly MSL trigger and $14.32.
