U.S. Steel’s journey to acquisition target

By Anirban Sen and David Carnevali

NEW YORK (Reuters) – U.S. Steel Corp has become the center‌ of‍ attention in the acquisition market. Short-term challenges, such as furnace upgrades and potential car production shutdowns, ​have ‌affected its valuation. However, this⁢ has attracted interest from potential buyers, according to insiders.

The Pittsburgh-based company, valued at $6.8 billion, is currently exploring its options and has received acquisition offers from industry players such as Cleveland-Cliffs Inc and Esmark Inc. ArcelorMittal SA is‍ also reportedly considering a bid, as reported by Reuters.

Before the‍ takeover interest was‌ revealed on Aug. 13, U.S. Steel’s shares were undervalued compared to its major competitors. The company’s market value, including net debt, was only 3.6 times its projected 12-month ‍earnings⁤ before interest, taxes, depreciation, and⁣ amortization (EBITDA), while Cleveland Cliffs was valued at 5 times. Nucor Corp and Steel Dynamics Inc, two other U.S. rivals,⁢ trade at higher multiples, according to‍ Refinitiv data.

Cleveland-Cliffs⁢ and Esmark have both offered to acquire U.S. Steel at a valuation of 6.2 times its ⁣2024 EBITDA, according to RBC Capital Markets analysts. ‌The discount in U.S. Steel’s valuation is partly ‍due ​to its current capital expenditure,​ which includes replacing old blast furnaces with electric arc‍ furnaces (EAFs).

EAFs offer flexibility in‍ operation and emit less carbon⁣ dioxide compared⁢ to blast​ furnaces,‍ making them ‍more environmentally friendly. While this investment in equipment is expected to pay ⁣off in the long term, it has limited U.S. Steel’s ability to return capital to shareholders in the near term.

Another concern for U.S. Steel is the potential strikes in the auto sector, which is a major client. U.S. President Joe Biden has called for a new agreement to avert strikes before the contracts expire next month.

Despite these challenges, U.S. Steel has attractive prospects that have caught the attention of potential buyers. The company supplies steel for renewable energy infrastructure and stands to benefit from the Inflation Reduction Act (IRA), which provides tax credits ⁣and incentives for such projects. U.S. Steel CEO David Burritt has praised the IRA as a major boost for the⁤ industry.

The company also expects its investment in the⁢ production of electrical steel, used in electric ⁣vehicle motors and power transformers, to be profitable. It forecasts a 7% compound annual growth rate for this segment, compared to 1% for the broader steel sheet market.

The U.S. steel industry has already benefited⁤ from import tariffs imposed in 2018, but supply chain disruptions and rising inflation have posed challenges. Despite this, U.S. Steel remains⁤ an attractive target for acquisition.

(Reporting by Anirban​ Sen and David Carnevali in New York; Editing by Greg Roumeliotis and Sonali Paul)

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