Search the site

Josh Spoores

Principal Analyst View profile

US Steel announced they are undertaking a formal review of strategic options after receiving ‘multiple’ unsolicited offers to purchase the company. This review process is to ensure the Board of Directors and executive management team act in the best interest of its company, stockholders, and stakeholders, the company says. This situation evolved quickly, yet we expect that any resolution will inevitably take time before a change in ownership, if any, is decided. During that time, it may not be unreasonable to see higher valuations emerge.

US Steel as a compelling buyout candidate

Since the pandemic lockdowns ended, steel mills in the USA have operated in a historically strong market, where earnings have risen at exponential rates. This incredible financial performance has allowed multiple steelmakers to improve their balance sheets, pay off debt, invest for the future, and buy back shares. With these improvements, US Steel has been able to expand its EAF steelmaking operations, further monetise its iron ore assets, and invest in new facilities including its new pig iron facility, an electrical steel line, and embracing endless casting technology in Arkansas.

This financial evolution experienced by US Steel has not gone unnoticed and today there are ‘multiple’ unsolicited offers to purchase the company. The first known offer was Cleveland-Cliffs looking to buy the full company. Cleveland-Cliffs has a long history of mining and they have only recently gotten into steelmaking by purchasing AK Steel and later the majority of ArcelorMittal’s assets in the USA. Cleveland-Cliffs is currently the largest flat-rolled steel company in the USA with the majority of its sheet products serving the automotive industry.

The second known offer is from Esmark, a quiet operator of steel service centers alongside some tin mill production. In the not-too-distant past, Esmark was able to buy out Wheeling-Pittsburgh as well as other steelmaking assets before selling them to OAO Severstal, just as the Global Financial Crisis was unfolding. Esmark continues to be led by James Bouchard, who has offered an all-cash offer for US Steel.

What makes US Steel an attractive takeover candidate is the amount of cash on its balance sheet. At the end of 2023 Q2, US Steel had an enterprise value of nearly $7 billion and just over $3 billion of cash on hand with net debt of almost $1.2 billion. With 226 million shares, US Steel has nearly $14 of cash per share. The Cleveland-Cliffs offer is $17.50 in cash per share of US Steel stock, plus 1.023 shares of Cleveland-Cliffs stock. The offer from Esmark is all cash, and Bouchard said he has access to the cash.  For both offers, it is likely that the surplus of cash at US Steel will play a key role in paying for this acquisition.

The CEO of Cleveland-Cliffs, Lourenco Goncalves, has already received the full labour union support for his offer, which may be a very important variable. However, this acquisition by Cleveland-Cliffs would need to gain approval from the US Government as this consolidation would lead to the combined entity to have a near monopoly on both exposed automotive steels as well as tin mill products. In addition, Cleveland-Cliffs is the only US maker of certain electrical steels, while US Steel is building a new production line for this material. We are sceptical that Cliffs would be allowed by the US Government to proceed with this acquisition as it stands today. Likely, multiple divestitures would be required, which may affect the full benefit of the acquisition.

In addition to antitrust concerns on finished steel products, the potential acquisition of US Steel by Cleveland Cliffs would create just one company that mines and processes all the commercial iron ore in the USA.  

These offers have come as US Steel’s strategic progress of splitting off some older blast furnace assets to an operating partner have apparently stalled. There are potential other offers in the works as well. One may be a private equity partner coming into split US Steel’s assets off into iron production, clean EAF steel production, and BF/BOF based steel production. This type of offer may allow US Steel to continue operating its historic brand and truly embrace the technological advances the company is investing in today.

At CRU we will continue to follow these events as the outcome may very likely affect steel prices in the future as well as permanent changes to BF/BOF based steel production in the USA. We expect this story to further evolve before any conclusion is reached.

Josh Spoores

Principal Analyst View profile