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Key Points

  • US Steel announced its agreement to be acquired by Japan’s largest steel producer, Nippon Steel, for $55 in cash per share.
  • The transaction faces opposition from the United Steelworkers union and members of the U.S. Congress, citing security concerns.
  • Cleveland Cliffs is the largest maker of flat-rolled steel in the United States and could be an acquisition target.
  • 5 stocks we like better than Cleveland-Cliffs

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

Before you consider Cleveland-Cliffs, you’ll want to hear this.

MarketBeat keeps track of Wall Street’s top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on… and Cleveland-Cliffs wasn’t on the list.

While Cleveland-Cliffs currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.

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