U.S. Steel stock surged higher in Monday afternoon stock market action after a news release from Esmark, a small private company, announced a $35 cash offer to individual shareholders of X stock. That followed weekend news that the steelmaker rejected a $7.3-billion offer from Cleveland-Cliffs to create the biggest American steel producer.
Cleveland-Cliffs went public with its buyout attempt on Sunday after U.S. Steel spurned the offer, citing inadequate disclosure. U.S. Steel didn't shut the door on a transaction, while saying it has received alternative bids for "certain production assets" in addition to the buyout offer.
Cleveland-Cliffs offered $17.50 per share in cash, plus 1.023 shares of CLF stock, adding up to $33.91 per share, based on Monday afternoon prices. That represents a 49% premium to X stock's closing price of 22.72 on Friday. The deal would allow U.S. Steel shareholders to benefit from future increases in the CLF stock price.
Esmark Crashes CLF-X Party
Despite the rejection of the bid from Cleveland-Cliffs, U.S. Steel made clear it will entertain a transaction. The company invited CLF to participate in its examination of strategic alternatives.
The news provided a jolt of optimism that industry consolidation will lead to better supply discipline, a positive for steel prices. However, the entry of Esmark into the picture might alter that outlook of a merger of two steel behemoths. Esmark's portfolio of companies generate $500 million in annual sales vs. about $24 billion for CLF.
X stock climbed 37% to 31.07 in afternoon action, after rising to around 30 before the Esmark news broke. CLF stock pared gains on the Esmark news but was still up 8.8% to 15.98. Meanwhile, Nucor rose 3.3% and Steel Dynamics 5.1%.
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 secure regulatory approval. Among the hurdles: The X-CLF combination would create a monopoly in the U.S. iron ore market.
Gibbs also notes that both Cleveland-Cliffs and U.S. Steel are big suppliers to the auto industry.
However, Citi analyst Alexander Hacking called the offer "opportunistic." He sees U.S. Steel's long-term value closer to $46 a share. Hacking also expects government regulators to "take a long, hard look."
For its part, Cleveland-Cliffs said it expects "timely" regulatory approval. The company also touted the United Steelworkers union's endorsement of the deal, citing CLF's track record following other acquisitions.
CLF Cash Would 'De-Risk' X Capex
Both CLF and X stock have been stock market laggards the past couple of years. But Cleveland-Cliffs has transformed its balance sheet, reducing debt even as it returns cash to shareholders via buybacks.
"Differently from several of our competitors, our capex needs — both now and in the next few years — are well-known and low," CEO Lourenco Goncalves said in a Q2 earnings release last month.
Now Cleveland-Cliffs hopes to put some of its cash into a transformational deal, which it says would "de-risk" U.S. Steel's more onerous capital spending plans.
Together, Cleveland-Cliffs and U.S. Steel would ship 25.9 million tons of steel, overtaking Nucor, with 18.2 million tons. Still, CLF-X would be only the No. 10 steel producer globally.
