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Rapid Recap
Late in July, I made the argument that United States Steel Corporation (NYSE:X) is a strong buy. I noted in my analysis, titled “Future Energy Isn’t Happening Without Steel,” that:
there’s a lot to be excited about with U.S. Steel, as it’s one of the companies with the best balance sheet in its sector.
The [other] catalyst is that starting in 2024, U.S. Steel will start to cut back on its capex cycle with its Big River 2.
It’s the combination of its strong balance sheet and meaningful complete investment in U.S. Steel’s Electric Arc Furnace (”EAF”) that has different companies bidding for U.S. Steel.
How Should X Investors Think About Their Shares Now?
I wish my investment in X had ended with a better return for me. In fact, I’ve been holding on and recommending this stock for quite some time, and the return was nowhere near as strong as I believed was fitting or fair.
The fact of the matter is that the stock is now in play. There’s more than one company bidding for U.S. Steel, with Esmark’s bid at $35 per share in cash being the highest offer thus far.
And yet, the reason why I’m not going to hold onto U.S. Steel and wait for this closure to go through is threefold.
Firstly, it can take a long time for closure to take place. There will be a long period of checks being performed at U.S. Steel, which may ultimately see Cleveland-Cliffs Inc. (CLF) having to upwards revise its bid to out-compete the offer presently made by Esmark. Although I’m uncertain of this outcome.
Secondly, as I discussed in my Cleveland-Cliffs analysis in July, holds more than $4 billion of net debt and pension liabilities combined. Anyone that believes Cleveland is going to step up with a higher offer is misled. In what world does Cleveland-Cliffs have the means to significantly increase their bid for U.S. Steel?
Yes, as I previously noted, U.S. Steel does have a very strong balance sheet. That’s a large part of the reason why I recommended this investment in the first place. And yes, U.S. Steel has completed a large proportion of its Big River 2 capex cycle. Nonetheless, U.S. Steel carries approximately $1 billion of net debt, plus a large amount of outstanding liabilities.
In practice, this means that even if Cleveland-Cliffs had wanted to increase its bid for U.S. Steel, it would struggle to do so. And on top of that, I can’t imagine Cleveland-Cliffs CEO Lourenco Goncalves raising his bid. Goncalves has over time demonstrated tremendous business acumen as a terrific acquirer of businesses. Getting a bargain on U.S. Steel would mean too much for him.
Particularly given that Cleveland-Cliffs has the union’s agreement for this bid. This takes us to my third and final point.
United Steelworkers supports Cleveland-Cliffs’ bid for U.S. Steel. The union’s job is to make sure that the terms of employees are upheld. Cleveland has demonstrated in the past year a propensity to appease the unions, with workers’ hikes.
Meaning that the unions will not necessarily support the highest bid, but rather the best terms for employees.
The Bottom Line
My involvement with United States Steel Corporation has yielded returns below my expectations, prompting my decision to divest from U.S. Steel amidst the ongoing bidding war.
While multiple companies vie for control, notably Esmark with a $35 per share cash offer, my reservations about United States Steel Corporation stem from uncertainties surrounding the deal’s closure timeframe.
Extensive checks ahead could elongate the process, possibly compelling Cleveland-Cliffs to enhance its bid to outmatch Esmark’s. However, considering Cleveland-Cliffs’ significant debt and pension liabilities, a notable counterbid seems improbable.
Although U.S. Steel maintains a strong balance sheet, its sizeable net debt and liabilities deter easy escalation.
Moreover, the prospect of Cleveland-Cliffs CEO Lourenco Goncalves raising the bid appears remote, given his track record of judicious acquisitions.
Lastly, United Steelworkers’ backing of Cleveland-Cliffs’ bid complicates matters, prioritizing employee terms over the highest bid, adding a layer of uncertainty to the outcome.
