Nippon Steel confident hefty premium for U.S. Steel makes sense

Nippon Steel said on Tuesday it can afford to pay $14.9 billion for U.S. Steel, justifying the huge premium it offered as having "sufficient economic rationale", even as the Japanese steel giant's shares sank more than 5%.

The acquisition will help the world's fourth largest steel maker move toward 100 million metric tons of global crude steel capacity and make it a bigger supplier to the U.S. auto industry.

"Nippon Steel aims to complete a global network ... by establishing a base in the United States... where steel demand is expected to grow," the company's president, Eiji Hashimoto, told a news conference.


The Japanese steel giant clinched the deal with an offer of $55 a share in cash, which was a whopping 142% premium to U.S. Steel's share price on Aug. 11, the last trading day before Cleveland-Cliffs unveiled a $35-per-share, cash-and-stock bid.

When asked how Nippon Steel could justify paying such a high premium, Hashimoto said there was a "sufficient economic rationale", without elaborating.

The company has not given any projection on the value of the synergies that will arise from the deal.

"This deal will propel Nippon Steel into the top 3 global makers of steel," Japan analyst Mark Chadwick wrote on the Smartkarma research platform.

LSEG data showed Nippon is paying the equivalent of 7.3 times U.S. Steel's 12-month earnings before interest, taxes, depreciation and amortisation (EBITDA).

Nippon Steel's shares fell 5.5% in early trade in Tokyo, after being untraded with a glut of sellers after the open.

U.S. Steel shares ended trading up 26% at $49.59 on Monday following the deal announcement.

The automotive and transportation sector represented almost a quarter of steel shipments out of U.S. Steel's North American facilities in 2022, according to the company's annual report.

"The two combined will have a sizeable chunk of the global auto market and look well placed to benefit from the shift to EV motors known as e-steel," Chadwick said.

"Even so, it is hard ... to get excited given the looming costs to decarbonize the industry."

Nippon Steel also provides steel for renewable energy infrastructure such as wind turbines and so stands to benefit from the U.S. Inflation Reduction Act (IRA), which provides tax credits and other incentives for such projects.