US Steel's deal is in limbo

Nippon Steel’s proposed $14.9 billion takeover of US Steel is stuck. On 2 December President-elect Donald Trump said again that he would block the deal once in office, insisting that the storied American steelmaker must stay in domestic hands. The merger-arbitrage spread has widened to record levels.

The deal has been in trouble almost from the day it was announced last December. Nippon Steel offered $55 a share in cash, well above a rival approach from Cleveland-Cliffs, and US Steel's board accepted. The United Steelworkers union objected at once, arguing that it had not been consulted and that a foreign owner could not be trusted to protect American jobs. With Pennsylvania, US Steel's home state, a decisive swing state, both presidential campaigns took the union's side. President Joe Biden said in March that the company should remain American-owned.

Allies need not apply

By turning a commercial deal between companies from allied countries into political theatre, Washington is warning off foreign investors. US Steel’s ageing blast furnaces need billions of dollars of new investment, and only Nippon Steel has promised to pay for it. Block the deal on national security grounds and the company will be left short of capital.

The security argument is thin. Japan is a treaty ally, and for several years it has been the largest source of foreign direct investment in America. Nippon Steel has pledged to keep US Steel's headquarters in Pittsburgh, to honour the union contract and not to close plants. American steel for defence needs is also produced by domestic rivals, and US Steel accounts for a modest share of national capacity compared with its dominance a century ago, when it was founded in 1901 as the world's first billion-dollar corporation.

How the review works

The formal decision rests with the Committee on Foreign Investment in the United States, an inter-agency panel led by the Treasury that screens foreign takeovers for security risks. The companies withdrew and refiled their application in September, which pushed the review past the election. The committee can clear the deal, impose conditions or refer it to the president, who has the power to block it. A decision is due later this month, which means President Biden could make the call before he leaves office, and President-elect Trump's statements leave little doubt about what would happen afterwards.

The statute gives the president unusual latitude. Under the Exon-Florio amendment of 1988 to the Defense Production Act, a president may block a transaction if he finds credible evidence that it threatens national security and that other laws cannot deal with the threat, and courts have been reluctant to question such findings on their merits. That discretion is what turns a regulatory review into a political decision.

Precedents for a political veto

America has blocked or chased away foreign buyers before, usually from countries it regarded as rivals. In 2005 China's CNOOC abandoned its bid for the oil company Unocal after a political backlash in Congress. In 2006 Dubai Ports World agreed to sell the American port terminals it had acquired after lawmakers objected. In 2018 Mr Trump used his authority to block Broadcom's bid for Qualcomm, citing the risk to American leadership in chips. Blocking a Japanese buyer of a steelmaker on security grounds would be a sharper break, because it would treat an ally's investment as a threat.

Who wins and loses from a block

The merger-arbitrage funds that bought US Steel shares to capture the gap between the market price and the $55 offer are the first losers, and the record spread shows how much they now expect to lose. Ordinary shareholders would lose the takeover premium. Nippon Steel would owe US Steel a break-up fee of $565 million if the deal fails on regulatory grounds, which cushions the blow for US Steel but hardly replaces the investment it would forgo.

Cleveland-Cliffs could emerge as the winner, since it has signalled that it would still like to buy some or all of US Steel's assets, and a domestic merger would concentrate the American steel industry further. The union would see its preference honoured. Steel users, from carmakers to appliance makers, would face a less competitive domestic market, particularly if the incoming administration also raises tariffs on imported steel.

The case for the critics

Opponents of the deal have a coherent argument, even if the security label is a stretch. They say that strategic industries should remain under domestic control, that foreign owners may favour their home plants in a downturn, and that the union's concerns about jobs deserve weight. Nippon Steel's promises are binding only as far as their contracts and any conditions imposed by regulators allow. Those points could justify strict conditions on the deal. They do not explain why a buyer from a close ally that has offered to invest should be turned away outright.

What to watch

The committee's decision this month, and whether Mr Biden acts on it before 20 January, will settle the near-term outcome. A legal challenge is possible if the deal is blocked, since a decision driven so openly by politics would invite one. Beyond the steel industry, Japanese companies weighing large American investments will draw their own conclusions, and so will investors from other allied countries.

If Trump blocks the deal, US Steel’s shareholders lose a premium and its furnaces lose an investor. Foreign buyers eyeing American industrial assets will note the price of political risk and probably take their money elsewhere. The likeliest outcome is a block before the end of January, a legal fight that drags on for months, and a US Steel that ends up smaller or in Cleveland-Cliffs' hands, with its own shareholders and ageing plants the main losers.