Steel Trap

The Credit Strategist Blog

The Wall Street Journal’s editorial page sharply criticized President Biden for blocking Nippon Steel’s proposed takeover of U.S. Steel (X) today. Their criticism was justified but they said little about the fact that President-Elect Trump promised to do exactly the same thing. This wasn’t a partisan error - it was an American error. Nippon Steel’s $15 billion bid was defeated by election year politics and economic nationalism. Apparently, it’s not enough to build in America - businesses also have to be owned by Americans to pass political muster in today’s world. This is a road to nowhere good.

This decision has things completely backwards. Despite claims that globalization is now reversing, we still live in a globalized economy. The fact that globalization hurts American workers and their unions won’t change that reality. Unions and the politicians protecting them are fighting a war they already lost. Without the Nippon Steel deal (or one like it from a deep-pocketed acquiror), U.S. Steel is facing a bleak future much less attractive than one under the ownership of a well-heeled company domiciled in one of our closest allies.

Nippon Steel promised to revitalize troubled U.S. Steel with $2.7 billion in fresh capital that is likely unavailable from domestic sources (even private equity firms that are sitting on large amounts of capital are reluctant to invest and if they do won’t bring the type of manufacturing and technical expertise the Japanese steel company offers). Where else can U.S. Steel find the capital to revitalize its business?

Certainly not from a U.S. competitor of which there are few. U.S. competitor Cleveland-Cliffs Inc. (CLF) made a lower bid for U.S. Steel in 2023 and wants to keep the domestic steel industry under American control but can’t afford to do so. CLF has a stock market value of $4.7 billion with $3.5 billion in debt and isn’t large enough to buy U.S. Steel. If it were to use any significant amount of debt to buy U.S. Steel, the combined company would likely end up in bankruptcy relatively quickly (or seeking a government bailout). A highly leveraged steel company can’t compete in today’s world. Only a stock-for-stock merger between CLF/X would work from a capital structure standpoint and at a lower price than Nippon Steel offered. By rejecting Nippon Steel on dubious “national security” grounds (Japan is one of our closest allies and just last week the State Department approved the sale of surface-to-air missiles to Tokyo), America is sending a message of protectionism and economic parochialism to the world that will make foreign capital think twice before devoting time and money to investments here.

Both Biden and Trump were going to block this deal and both were making a mistake because they were guided by politics and mistaken notions of protectionism. Protectionism is not what’s best for America. The world is borderless whether our leaders like it or not. They are fighting a battle they can’t win. And when they lose, American workers, consumers and shareholders will pay the price.