Steel giant Cleveland-Cliffs Inc. has made public its intention to acquire all outstanding stock of the United States Steel Corporation in a cash and stock deal that would — if approved by shareholders and regulatory officials — create one of the world’s largest steel producers. 

The offer, which had been kept under wraps when first presented to the board of US Steel at the end of July, was made public by Cleveland-Cliffs on August 11 and disseminated in a company news release on August 13. 

Cleveland Cliffs HQ.jpgCleveland-Cliffs has offered to purchase all existing US Steel shares outright through a combination of cash and stock valued at about $7.5 billion; US Steel has called the proposal "unacceptable."— Photo courtesy of Cleveland-Cliff
According to Cliffs, the largest flat-rolled steel producer in North America, terms of the deal include acquiring 100% of the outstanding stock of US Steel for a per-share value of $17.50 in cash and 1.023 shares of Cliffs stock, which values the transaction at more than $7 billion.

On July 28, during its initial entreaty, the deal implied a total consideration value of $35.00 per share of US Steel stock, representing a 42% premium to US Steel’s share price as of the market close on July 28, 2023. 

Notwithstanding the terms of Cliffs’ offer, it was rejected as being “unreasonable” by the Board of Directors of US Steel via a letter Cliffs received on August 13, which likely precipitated the release of the offer to the press. 

In its news release, Cliffs said it “feels compelled to make its offer publicly known for the direct benefit of all of US Steel’s stockholders and also make it known that Cliffs stands ready to engage on this offer immediately.”

US Steel-RSP-TOF.jpgUnder the United Steelworkers’ collective bargaining agreement with US Steel, the USW has the right to counter this proposal. On this, Cliffs said the USW has affirmed in writing to Cliffs that it endorses the transaction and would not exercise its right. Furthermore, Cliffs said the USW would not endorse anyone other than Cliffs for an acquisition.

Lourenco Goncalves, chairman, president and CEO of Cleveland-Cliffs, made clear the offer was not an impulse buy and, by going public, hopes to put pressure on the US Steel board through its shareholders.

“On July 28th, I approached US Steel’s CEO and Board with a written proposal to acquire US Steel for a substantial premium, valuing the company at $35.00 per share with 50% cash and 50% stock. After two weeks without any substantive engagement from US Steel with respect to the economic terms contained in our compelling proposal, US Steel’s board of directors rejected our proposal, calling it ‘unreasonable,’” Gonclaves said in a statement. 

“As such, I believe it necessary to now make our proposal public to help expedite substantive engagement between our two companies. Although we are now public, I do look forward to continuing to engage with US Steel on a potential transaction; I am convinced that the value potential and competitiveness to come out of a combination of our two iconic American companies is exceptional,” Cliffs’ CEO added.

According to the news release, the proposed transaction has the unanimous approval of Cliffs’ Board of Directors and is not subject to any financing condition. Several tier 1 US and international banks have advised in writing that they are highly confident they can arrange the necessary debt financing for the proposed transaction.

The offer, valued at about $7.25 billion, would launch Cliffs into the upper echelon of top global steel producers, a list that China now dominates. The combined company would become an immediate power player as the principal supplier to the automotive industry and control 100% of domestic iron ore reserves.

The bid is happening during an interesting period for producers, including US Steel, which predicts that domestic demand will get a boost from green-energy infrastructure and manufacturing products, bolstered by signage of the Inflation Reduction Act.

If the deal goes through, the combined company would create the one of the world's largest steel producers outside of China.

Cliffs’ CEO, whose style has been described by some as pugnacious, clearly sees an advantage to leaking the offer to the public. In early hours trading on Monday, shares of US Steel rose as much as 29% in New York, the highest since early March. Cliffs saw its share price increase by more than 3%.

“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,” Gonclaves said. “With these benefits, combined with our experience of extracting meaningful synergies from previous acquisitions, we expect to create a lower-cost, more innovative, and stronger domestic supplier for our customers across all segments; … the transaction provides immediate multiple expansion to US Steel stockholders.” 

Cliffs said that, based on reviews by outside counsel, it believes the proposed transaction would receive regulatory approval promptly. Moelis & Company LLC, Wells Fargo, J.P. Morgan and UBS are financial advisors to Cliffs; Davis Polk & Wardwell LLP serves as legal counsel.

The company was traditionally an iron ore miner rather than a steelmaker. However, it has been actively diversifying its holdings in recent years, first snapping up AK Steel Holding Corp. and then buying the U.S. business of European steel giant ArcelorMittal. The purchases made Cliffs a key domestic operator of traditional blast furnaces and gave it a significant foothold in the steelmaking business for the car industry.

US Steel, which traces its roots back to 1901 when J. Pierpont Morgan merged a collection of assets with Andrew Carnegie’s Carnegie Steel Co., has undergone a dramatic shift in recent years under current CEO David B. Burritt, as its investment focus pivoted toward the more modern plants.

In 2017, US Steel purchased Big River Steel in Arkansas, and that acquisition has since paid substantial dividends as reflected by the company’s share price more than doubling since 2019. 

According to Fortune magazine reports, US Steel has hired Barclays Capital Inc. and Goldman Sachs Group Inc. as financial advisers for its strategic review. The steelmaker hasn’t set a deadline for the review to be completed, and the process may not result in a transaction or any other strategic outcome, the company said in a statement.

“We have proven in our previous M&A transactions our strong track record of significant value creation and our ability to grow the business through the addition of thousands of union jobs,” Goncalves’ expansive statement concluded. “Finally, with this transaction, we will create the only American member of the Top 10 steel companies in the World.”