Japan's Nippon Steel has won the bidding war for U.S. Steel in an all-cash deal valued at $55 per share of X stock, or $14.9 billion including assumed debt. The deal has mixed implications for U.S.-based competitors and further consolidation, but the initial reaction from investors was to send Nucor, Steel Dynamics and Cleveland-Cliffs higher.
The logic behind the surge in CLF shares quickly became clear. Since it isn't splurging on a takeover of U.S. Steel, Cleveland-Cliffs will extra cash to devote to "more aggressive stock buybacks," CEO Lourenco Goncalves said in a statement.
Nippon Outbids Cleveland-Cliffs And ArcelorMittal
For Nippon, the deal provides geographic diversification and technological capability, while raising its stature as one of the world's largest steel producers. Nippon said it will honor all existing union contracts, a key to making the deal workable. Previously, the United Steelworkers had come out in support of Cleveland-Cliffs as its preferred buyer of U.S. Steel.
Last week, CNBC reported that Cleveland-Cliffs and Luxembourg-based ArcelorMittal were among multiple potential acquirers offering more than 40 per share for X stock. CLF was said to be offering a combined cash-and-stock deal.
U.S. Steel Takeout Implications
A Cleveland-Cliffs-U.S. Steel combination would have resulted in a dominant supplier to the U.S. auto industry, likely raising some regulatory issues. Nippon's acquisition is probably a relief for major automakers.
Cleveland-Cliffs' initial $7.3 billion offer for U.S. Steel in August also provided a sectorwide boost amid optimism that industry consolidation would lead to better supply discipline, a positive for steel prices.
Yet Nippon's acquisition won't have that effect of restraining competition.
Why Are Steel Stocks Rallying?
So why are steel stocks rallying? For one thing, the nearly $15 billion price tag is a vote of confidence in the outlook for the steel sector. Suddenly, CLF stock's $9.4 billion market cap looks modest by comparison.
Steel stocks were already in rally mode last week, helped by a bullish outlook from Steel Dynamics, which was Friday's IBD Stock Of The Day.
"Steel order activity remains solid, as evidenced by extended order lead times and recent pricing increases" heading into Q1, the company said in a statement.
Near-month Midwest domestic hot-rolled coil steel futures pricing has climbed to $1,068 per metric ton, up from a low around $700 in September and the first half of October. Settlement of the United Auto Workers strike has been among the factors leading to firmer pricing.
An even bigger driver of steel stocks last week may have been Federal Reserve chair Jerome Powell's determination to nail a soft landing. With inflation close to the Fed's 2% goal on a six-month annualized basis, Powell has shifted focus to not keeping policy tight for too long.
Risk of an economic downturn has largely dissipated, with the S&P 500 hitting a new high, the 10-year Treasury yield falling below 4%, and markets pricing in 1.5 percentage points of rate cuts next year. That will brighten the outlook for big steel industry customers, like the auto and construction industries.
More Steel Industry M&A To Come?
Are investors betting that more steel M&A will follow the purchase of U.S. Steel? That's unclear. Perhaps investors think that ArcelorMittal, which sold off its U.S. operations to Cleveland-Cliffs a few years ago, might mull a bid for CLF or a smaller steelmaker.
It's hard to imagine either Nucor, with a $42 billion market cap, or Steel Dynamics, valued at $20 billion, will be a takeover target. However, NUE stock and STLD stock may be rising due to relief that Cleveland-Cliffs wasn't the winning bidder, since that would have created a more formidable rival.
Cleveland-Cliffs' Goncalves said the price paid for U.S. Steel by Nippon "validates our view that our sector remains undervalued by the broader market."
Noting that CLF has reached its net debt target of $3 billion, he added that the company "will now refocus our capital allocation priorities toward more aggressive share buybacks under our existing share repurchase authorization."
X Stock Leads Steel Stocks Higher
X stock surged 26.2% to 49.61 in early Monday stock market action, a modest discount to the $55-per-share offer.
CLF stock rose 10% to 20.56. NUE rose 2.1% and STLD 0.9%. MT stock rose 5.3%.
Nippon Steel stock slipped 4.3%.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
