A Possible Merger
Cleveland-Cliffs Inc. has declared its aspiration to take over United States Steel Corp., situated in Pittsburgh. Should the merger be successful, it would lead to a complete unification of blast furnace/basic oxygen furnace (BOF) steelmaking capabilities in America.
At the end of July, Lourenco Goncalves, chair, president, and CEO of Cleveland-Cliffs, presented a written proposal to U.S. Steel’s CEO and board that would see Cleveland-Cliffs acquire the company. “On July 28, I approached U.S. Steel’s CEO and board with a written proposal to acquire U.S. Steel for a substantial premium, valuing the company at $35.00 per share with 50 percent cash and 50 percent stock,” he stated.
Then on August 13th, David Burritt, President, and CEO of U.S. Steel, responded to the proposal with a letter posted on its website. In it, he expressed discontentment with how Goncalves and Cleveland-Cliffs had handled the offer and made clear that it was rejected by U.S. Steel’s board of directors.
“We discussed with your counsel questions that would need to be better understood in order for both of us to appropriately assess the antitrust risk of your proposal; and while your counsel agreed that this would need to be analyzed, and was amenable to our proposal to work on this together, this still has not happened,” wrote Burritt.
“After multiple conversations about, and our team’s engagement in good faith negotiations over, the terms of the non-disclosure agreement (NDA), we were shocked to receive a letter on Friday, August 11, stating that you refused to sign the nearly completed NDA unless we agree to the economic terms of your proposal in advance,” the U.S. Steel CEO added.
Burritt continued, “Our board – or any board – could not, consistent with its fiduciary duties, agree to a proposal of which 50 percent is represented by your stock without conducting a thorough and completely customary due diligence process, to evaluate the risks and potential upsides and downsides inherent in the transaction, including the stock component.”
U.S. Steel Releases New Statements
Just a few hours following the issuance of their bid rejection press release, U.S. Steel provided two additional statements over the weekend: an announcement regarding the initiation of a “strategic alternatives process” and another which revealed that Cleveland-Cliffs has been invited to participate in that process.
As part of the August 13th announcement, it was reported that Cleveland-Cliffs and Goncalves had the approval of the United Steelworkers (USW) union for the proposal.
“Under the terms of the USW collective bargaining agreement with U.S. Steel, the USW has the right to counter this proposal,” notes Cleveland-Cliffs. “On this matter, the USW has affirmed in writing to Cliffs that it endorses the transaction and will not exercise this right. Furthermore, the USW has also stated that it will not endorse anyone other than Cliffs for a transaction.”
Goncalves adds, “Our proposal has the full support of the United Steelworkers union. We have proven in our previous M&A [merger and acquisition] transactions our strong track record of significant value creation and our ability to grow the business through the addition of thousands of union jobs.”
The USW President, Thomas M. Conway expressed his strong support for the extension of Cliffs’ partnership with U.S. Steel, writing, “Cliffs has shown itself to be an outstanding employer to all its workers [and] we have no doubt that the extension of our strong partnership with Cliffs to the 11,000 union-represented employees at U.S. Steel will benefit the employees, their families and the communities in which they operate.”
“Regulatory Scrutiny” Anticipated
Burritt’s letter suggested that a merger between the only remaining two integrated steel producers in the U.S. would be likely met with opposition from regulatory bodies, given their vast combined resources running from mined iron through to BOF output. Addedly, both companies control EAF production facilities, most notably U.S. Steel’s Big River Steel site in Osceola, Arkansas.
Regarding blast furnace/BOF capacity, U.S. Steel has facilities located throughout Granite City, Illinois; Gary, Indiana; and Braddock, Pennsylvania. Cleveland-Cliffs also operates many mills previously run by AK Steel and ArcelorMittal based in Luxembourg. These factories are located in Riverdale, Illinois; Burns Harbor and East Chicago, Indiana; Dearborn, Michigan; and Cleveland and Middletown, Ohio.
Currently, there are three blast furnace/BOF campuses working across Canada. However, ArcelorMittal and Algoma Steel have decided to move towards Electric Arc Furnace (EAF) technology instead. Therefore, should the merger between Cleveland-Cliff’s and U.S. Steel take place, Stelco Inc., based out of Hamilton, Ontario would be the only non-Cleveland-Cliffs BOF mill running within both U.S. and Canada.
Despite the potential to increase BOF capacity at a domestic level, Goncalves insists that the proposed merger will ultimately result in a worldwide competitive steel manufacturer.
“With this transaction we will create the only American member of the Top 10 steel companies in the world, joining a select group of just three other companies outside of China — one European, one Japanese and one Korean,” the CEO states. “We believe that having Cleveland-Cliffs as a world-class, internationally competitive steel company is critical for our country to retain its economic leadership and to regain its manufacturing independence.”
The Offer Goes Public
In accordance with the terms of the offer made, Cleveland-Cliffs explains that it has “proposed acquiring 100 percent of the outstanding stock of U.S. Steel for a per share value of $17.50 in cash and 1.023 shares of Cliffs stock. As of the close of market on Friday, August 11, 2023, this offer represents a 43 percent premium to U.S. Steel’s share price.”
Cleveland-Cliffs made an offer to U.S. Steel in late July, yet on August 13th the initial offer “was rejected as being ‘unreasonable’ by the board of directors of U.S. Steel via a letter Cliffs received.” “As such, Cliffs feels compelled to make its offer publicly known for the direct benefit of all of U.S. Steel’s stockholders and also make it known that Cliffs stands ready to engage on this offer immediately.”
Goncalves continues, “Although we are now public, I do look forward to continuing to engage with U.S. Steel on a potential transaction, as I am convinced that the value potential and competitiveness to come out of a combination of our two iconic American companies is exceptional.”
He adds, “The numerous benefits we are excited about include the combination of our complementary U.S.-based footprint, our ability to leverage our in-house metallics capabilities, and enhancing our shared focus on emissions reduction.”
An Update within the Metallics Sector
Working within the metallics industry, both companies handle iron to fabricate furnace feedstock. Additionally, Cleveland-Cliffs possesses the Ferrous Processing & Trading (FPT) network of scrap recycling yards based out of Detroit.
Concerning the proposed merger, Goncalves attests that, “The transaction provides immediate multiple expansion to U.S. Steel stockholders, while simultaneously de-risking U.S. Steel’s future capital spend with our substantial expected free cash flow and very healthy balance sheet.”
Cleveland Cliffs’ board of directors has given their unanimous approval for a proposed transaction, one that does not require any form of financing condition to be met.
An array of top-tier financial institutions have also been brought on to aid in the process, such as Moelis & Co. LLC out of New York, Wells Fargo, J.P. Morgan, and UBS; Davis Polk & Wardwell LLP is acting as legal counsel for the steel producer.
