U.S. Steel explores strategic alternatives after rejecting Cleveland-Cliffs offer (update)

Taitai6769/iStock via Getty Images

Update 9:40pm: Adds U.S Steel confirming Cleveland-Cliffs offer.

U.S. Steel (NYSE:X) said it started a formal review process after rejecting a $7.25 billion cash and stock takeover offer from Cleveland-Cliffs (NYSE:CLF).

Cleveland-Cliffs (CLF) said it made an offer to U.S. Steel's board on July 28 consisting of $17.50 in cash and 1.023 shares of Cliffs stock, according to statement on Sunday. The offer, which as of the close of Friday values U.S. Steel at $32.53 per share, represents a 43% premium to U.S. Steel's (X) closing price on Friday. The bid was rejected as being "unreasonable" by U.S. Steel's board on Sunday.

U.S. Steel (X) said it began a review process after receiving multiple offers that ranged from the acquisition of certain production assets to proposals for the entire company, according to a statement on Sunday.

U.S. Steel (X) announced after Cleveland-Cliffs (CLF) revealed its bid publicly on Sunday that it invited Cliffs to participate in its review process, according to a statement Sunday night.

U.S. Steel also said it was unable to properly evaluate the proposal from Cleveland-Cliffs because the company refused to engage in the "necessary and customary" process to assess valuation and certainty unless U. S. Steel agreed to the economic terms of the proposal in advance.

Cleveland-Cliffs (CLF) said it remains prepared to engage immediately in "substantive discussions" with U.S. Steel to work towards a mutually acceptable definitive agreement and is ready to commit all necessary resources to finalize documentation. A combined Clifffs and U.S. Steel (X) is expected to generate synergies of about $500 million.

The United Steelworkers union affirmed in writing to Cliffs (CLF) that it endorses the transaction and will not exercise this right. The USW has also stated that it will not endorse anyone other than Cliffs for a transaction, according to the Cliffs statement.

“U. S. Steel’s Board and management team are committed to maximizing value for our stockholders, and to that end, we have commenced a comprehensive and thorough review of strategic alternatives,” David B. Burritt, U. S. Steel’s CEO said in the statement on Sunday earlier. "This decision follows the Company receiving multiple unsolicited proposals that ranged from the acquisition of certain production assets to consideration for the whole Company. The Board is taking a measured approach to considering these proposals, including seeking more information in order to evaluate proposals that are preliminary and subject to ongoing due diligence and review.”

There's no deadline or definitive timetable set for completion of the strategic alternatives review. U.S. Steel (X) said there can be no assurance that the result will result in the company pursuing a transaction or any other strategic outcome.

U.S. Steel (X) has a market cap of $5.1 billion. Its shares have dropped 9.3% this year vs a 26% gain for larger competitor Nucor (NUE) and a 4.7% increase for Steel Dynamics (STLD). Shares of Cleveland-Cliffs, which has a market cap of $7.5billion, have fallen 8.8% this year.

Barclays Capital Inc. and Goldman bSachs & Co. LLC are serving as financial advisors to U. S. Steel (X). Milbank LLP and Wachtell, Lipton, Rosen & Katz are acting as legal advisors.

Moelis & Company LLC, Wells Fargo, J.P. Morgan and UBS are acting as financial advisors to Cliffs (CLF) and Davis Polk & Wardwell LLP is serving as legal counsel.

More on U.S. Steel and Cliffs

• United States Steel: Implications Of The Manufacturing Renaissance
• U.S. Steel CEO Burritt is bullish on America, thanks to Inflation Reduction Act
• United States Steel: Future Energy Isn't Happening Without Steel
• Why Cleveland-Cliffs Is Positioned For Tomorrow's Economy
• Cleveland-Cliffs Earnings: Steel's Vital Role In The Energy Transition

Comments

[PT Larry]

Here’s my two cents having added both Cliffs and X after hearing the news. X is cheap, but why, and when will it ever recover, next year, the year after that?

Cliffs is going to do this, even if it take a hostile takeover, BECAUSE X IS CHEAP, and do you blame LG. This is what he does, has done, will continue to do.

Amen

BTW, the X name will survive the acquisition.

[PEAK AUTOS]

I am just wondering if X longs are buying more shares or selling some of their position at current prices?

I am long X but so far I have just been sitting on my hands. I am angry with the board for the contract with the union without even asking the shareholders for approval. I hope not but this could cost all of us a lot of money and if not for this agreement with the union I would have already purchased more shares.

[PT Larry]

@PEAK AUTOS I was long X and added with the news, and added again today.

[PEAK AUTOS]

@PT Larry Thanks Larry. I am still sitting on my hands hoping for an update from X board this week. If not for the union option to match I would have purchased more shares. If a new bid comes in at $38-$39 and the stock does not pop I will buy more.

[Yo, Ed]

@PEAK AUTOS Does the Board typically as shareholders how to deal with the Union???

[Ok 3]

I think any company that buys X will consolidate the business and shut down or idle parts of the company that’s not making money due to market conditions

[PEAK AUTOS]

@Ok 3 I do not see CLF doing this or really any company with the union watching so closely. Down the road I can see them shutting down some furnaces for extended periods stating they need to do repairs but not an entire facility.

[Udith Fonseka]

@Ok 3 i dont see this as Im guessing that no significant parts of the company are not making money--maybe just continuing to modernize some of the older plants/furnaces.

[Pabst]

In reviewing X's statement, the company said it is reviewing "multiple bids". So we have CLF, MT and Esmark. In American English, multiple means more than 3. Just putting this out there.

[PEAK AUTOS]

I heard rumors this afternoon, Wednesday, 08/16, that we have a European Steel Company coming in with a bid for X. I do not know if it is for the entire company or just the European small operation.

[Udith Fonseka]

@PEAK AUTOSIm not sure who the European company is--but I would not call X's European operations small.

[alainusa]

seekingalpha.com/...
It would be crazy to sell company at these valuations, the offer should be much higher...

[Ok 3]

@alainusa how high should the valuation be ??? Some people think it’s fairly priced..

[alainusa]

@Ok 3 of course, and they are all clf shareholders:-)))))) everything under 40$ is steal

[Krypto]

Hard to believe the Steel Workers Union wants to truly be a partner, but it would be great for American business if it could happen in a way that everyone benefits. I have no idea what that would look like, though.
Generally speaking, you need a hard-nosed leader and good, hardworking soldiers who follow legitimate orders. They should be led by inspiring, hard working officers.

[cwebjohn]

Why are $X shareholders not willing to sell? Holding out for more? Why? How much more do you expect? Sounds irrational.

[ESP equity research]

@cwebjohn Because we feel the fair value of X has been and continues to be north of $40...

Hope this helps...

ESP

[daviry2367]

@cwebjohn in business taking the first offer you receive often means you should be fired.

[Pabst]

@cwebjohn And you don't think the $35 all-cash offer from Esmark is better than CLF's? If you're a CLF believer, buy shares at current prices.

[Mbrot]

CLF continues to be the best thing to happen to the steel industry. As far as the debt comments, CLF reduced debt at a torrid pace, took on two major acquistions increasing debt, and since then has been paying it down rapidly. As I said when CLF was $ 2/share, this LG wants to be great at steel, and that is good enough for me.

[PT Larry]

@Mbrot My guess is that after the acquisition the US Steel name and ticker symbol (x) will survive.

[PEAK AUTOS]

@PT Larry I would sell it to Elon Musk. How about you?

[Mbrot]

@PT Larry I would give it to Elon and sign a contract for electrical and other high strength steels on for his cars. Then how about CLFX?

[Krypto]

LG is entertaining, but he has disappointed me with his failure to reduce the debt like he promised. However, there are too many steel producers in the world, including China. This deal would monopolize iron ore, at least the good and local stuff, for X and CLF - MSB is down on this news.

[bessaff]

@Krypto “MSB is down on this news.” I still do not understand why MSB continues to exist.

[bessaff]

@Krypto A zero revenue generating entity with little hope for the future. Baffling.

[Krypto]

@bessaff The royalties are worth a lot, and somebody will want that ore someday.
A third party could buy the whole thing and then negotiate with LG's successor someday.

[pat45]

Both stocks worth more than they are trading at!

[daviry2367]

@pat45 for sure

[dn4911]

So impressed with this proposal and how well LG has orchestrated it. The X short interest is 7.5%. They’re gonna have to cover. With the excellent USW letter I see no way this doesn’t close. I’m thinking best way to play is to buy both.

[ESP equity research]

@dn4911 LG needs shareholder approval - not the Unions. I will not vote for this deal with my shares. I have no issue with CLF acquiring X - But X is not for sale, so you need to pay more than book value/nav - so the price is $45+...

ESP

[Pabst]

@ESP equity research I have 7 times more CLF shares than X shares. In the short term and with current terms, I'm scrooood. And then if X demands and gets more....

[ESP equity research]

@Pabst I own X, STLD, ZEUS, with X being my largest holding. I like CLF - but its stock has always looked overvalued to me.

Even if CLF pays $40 a share - this would be positive for CLF in several ways:

It would actually help its balance sheet - yes X has 3.8B in Debt - but also over 3B in cash which generates like 3 times more income than the debt service costs. X has some notes with 2029 data I believe with really low interest rates - does CLF just get those notes, or does it have to pay them off?

And thier will be synergies here in the USA for sure...

ESP

[fairmountcreek]

bizjournals dot com / Pittsburgh / - has a nice breakdown of the terms of the deal.

[Ok 3]

@fairmountcreek where is the link

[Mork747]

LG to make his case on CNBC @11am EST today.

BTW, can take the USW statement with a grain of salt as Biden Administration has demonstrated they will tell unions what to do or not do ala the latest rail workers settlement. Why would this be any different. Question is where is Biden on this one? Backing PA or OH?

[dn4911]

@Mork747 Biden will support. It makes the US A stronger.

[Finding Your Retirement]

@dn4911 just like AT&T buying time warner made america stronger...after laying off all those people

[Pabst]

@dn4911 "Biden will support. It makes the US A stronger." And WHEN has THAT become an interest of his?

[phyllisquirk]

well, this entire approach (UAW involvement) takes moxie to a whole new level IMO. there is assertiveness and then there is pure aggression. this is more than a "bear hug".

m barra is probably on speed-dial with nue, stld, aa, stelco, ternium, cstm even.
this action also smacks of desperation in it's forcefulness. why, LG??

and, is this the Last Nail for the BF steel industry as we know it, built by andrew carnegie? t/c

[BasedCapitalist]

I was telling Elon to buy $X in March 2020. It's hard to understand why, but billionaires rarely listen to me, when I randomly give them unsolicited advice on Twitter.

[bessaff]

@BasedCapitalist well if he had he may have done the same to X as he did to Twitter. And Cliff would be soaring ;-)

[Yo, Ed]

@BasedCapitalist Holmes, you got to knock on their door if you want them to listen.

[Michael Wiggins De Oliveira]

As far as I can tell, I've been the only person that has been arguing that X is undervalued.

I could be wrong. There may have been others. But it's nice to see that my analysis paid off.

I'm going to get paid. Finally.

seekingalpha.com/...

[alainusa]

@Michael Wiggins De Oliveira you are going to get paid if the deal will go through....until it won't stock will be probably around 30$, nothing special, it was 35$ last year without takeover

[Sound Investments]

@Michael Wiggins De Oliveira your disclosure stated that you had no position in X, and no plans to initiate one. Is this inaccurate?

[URL of York]

@Sound Investments LOL! Oops! 🤣

[Hurray]

What will car manufacturers say? They are unionized shops, too. Who will Joe listen to? This merger will certainly raise prices of steel products.

[daviry2367]

@Hurray car people will say no way.

[PEAK AUTOS]

@Hurray I do not think we can say it will raise the price of steel on anything other than short term basis. We import more steel than any one US steel company produces. Just so much steel capacity in the world that it will be hard for prices to go crazy.

[Hurray]

@daviry2367 I listened to LG's TV interview where he argued that the competition from imports will prevent price increases but he also said that the imports mostly go to foreign car makers - Korean, Japanese, and European. So the US-based manufacturers can in fact be hit by higher prices in which case they could fight the merger. We will see.

[WYCO Researcher]

CLF is grossly over paying.

[twirth]

@WYCO Researcher X has superior management, a superior balance sheet and superior cash flows. CLF proposes to strip X of all the cash on their balance sheet and give it to X shareholders and then get one share of their stock. Not in a million years would I take this deal.

[Sound Investments]

@twirth I know. It is awful. But CLF’s CEO is confident that they will take it. Has the board said anything to that effect?

[daviry2367]

@WYCO Researcher watch the higher prices come in.

[Pabst]

Honestly didn't know about CLF's involvement until 12:01 a.m. Monday. Had heard yesterday about X exploring options, but no mention then of CLF rejection. Have shares in both. With LG going public he's trying to bully Burritt into a hasty decision. I'd vote against the offer....have recently set a "reduced" exit target from CLF....not looking to acquire diluted shares in a deal.