Shares of US Steel rose 26% in the early Monday stock market action following news that the steelmaker rejected Cleveland-Cliffs’ $7.3 billion offer that would create the largest US steelmaker.
Cleveland-Cliffs went public on Sunday with its buyout attempt after US Steel rejected the offer, citing insufficient disclosure. US Steel did not close the door on a transaction, saying it has received alternative bids for “certain assets” in addition to the buyout offer.
Cleveland-Cliffs offered $17.50 per share in cash, plus 1,023 shares of CLF stock, equating to $35 per share. That represents a 43% premium to X’s closing price of 22.72 on Friday.
Regulatory risk for CLF-X deal
In a Monday note, KeyBanc analyst Philip Gibbs called the offer “more than fair,” but added that he expects “meaningful concessions” will be needed to gain regulatory approval. Among the hurdles: The X-CLF combination would create a monopoly in the US iron ore market.
Gibbs also notes that both Cleveland-Cliffs and US Steel are major suppliers to the auto industry.
However, Citi analyst Alexander Hacking called the offer “opportunistic.” He sees US Steel’s long-term value closer to $46 per share. Hacking also expects government regulators to “look closely”.
For its part, Cleveland-Cliffs said it expects “timely” regulatory approval. The company also praised the United Steelworkers union’s approval of the deal, citing CLF’s track record following other acquisitions.
CLF Cash would reduce risk X Capex
Both CLF and X stocks have been underperformers in the stock market in recent years. But Cleveland-Cliffs has transformed its balance sheet, reducing debt even as it returns cash to shareholders through buybacks.
“Unlike some of our competitors, our capex needs – both now and for years to come – are known and low,” CEO Lourenco Goncalves said in a Q2 earnings call last month.
Now Cleveland-Cliffs hopes to put some of its money into a transformational deal, which the company says would “reduce” U.S. Steel’s tougher capital spending plans.
Cleveland-Cliffs and US Steel would together ship 25.9 million tons of steel, overtaking Nucor with 18.2 million tons. Still, CLF-X would be the number 10 steel producer worldwide.
The X share climbed 6.09 to 28.81, while the CLF share rose 0.7% to 14.79 early Monday. Meanwhile, Nucor was up 1.8% and Steel Dynamics was up 0.7%, supported by hopes that consolidation in the industry will lead to better supply discipline, which is positive for steel prices.
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