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Experts: Potential U.S. Steel sale raises questions of monopoly, national security and offshoring

Gary Mayor Jerome Prince voiced support for Cleveland-Cliffs’ proposed buyout of the 122-year-old United States Steel Corporation as the industry giant mulls an array of acquisition offers.

“You never like to see your corporate citizens leave town, and certainly that would be applicable to U.S Steel,” Prince told the Post-Tribune. “But the bright side of it is that you know I’m really pleased, curious, excited and and certainly hopeful in the prospect that Cleveland-Cliffs emerges as the purchaser or at least someone that would be seriously considered, and did that extent I would certainly back any efforts of the Cliffs to do so.”

Steel industry experts are raising issues of monopoly, national security, and offshoring jobs as Pittsburgh-based U.S. Steel said it is entering into nondisclosure agreements with “numerous third parties” about a total or partial buyout, according to a Tuesday letter to shareholders.

“We announced our review on August 13 and have been impressed by both the high-level of interest from potential transaction partners and the speed with which our team is working,” company leadership wrote.

Founded in 1901, U.S. Steel was responsible for the founding of the city of Gary five years later. The company remains one of the largest employers in Northwest Indiana, despite the decline of steel production in the region over the last several decades.

The announcement of U.S. Steel’s “strategic review process” in August coincided with the news that the company had rejected rejected a $7.3 billion cash and stock buyout proposal from Cleveland-Cliffs, citing the unwillingness of its rival’s leadership to sign a nondisclosure agreement unless U.S. Steel agreed to the economic terms of their proposal in advance.

In a letter to Lourenco Goncalves, his counterpart at Cleveland-Cliffs, U.S. Steel Presidnent and CEO David Burritt wrote that accepting an offer partially made up of Cleveland-Cliffs’ stock without access to inside information bearing on the stock’s value “unreasonable.”

Matt Billett, a professor of finance and the Chase Chair of Banking & Finance at Indiana University’s Kelley School of business, said that while U.S. Steel’s desire for assurances is understandable, so is Cleveland-Cliffs apparent hesitancy about a nondisclosure agreement.

“Allowing the company to come in and open up your books and show them everything requires an enormous amount of trust,” Billett, who researches mergers and acquisitions and corporate restructuring, told the Post-Tribune. “And so I think it’s quite possible that (Cleveland-Cliffs) don’t want to open up their books to U.S. Steel and everyone else. They all may not think that U.S. Steel’s motives are simply to validate the value the company.”

For this reason, Billett said, “it’s very common in mergers and acquisitions to favor cash deals over stock deals.”

U.S. Steel did not close the door entirely on a Cleveland-Cliffs deal, and invited the company to participate in its review process. The company’s proposal has the backing of the United Steelworkers (USW), who have the right to bid on U.S. Steel as part of their collective bargaining agreement with the company, and of Gary’s mayor.

Prince said that while “I’m not prepared or qualified in that instance to guess or second guess their business decision,” he is optimistic about the deal.

“I just think that they’re responsible people,” he said. “I do know that they have expressed some interest in wanting to engage with the city of Gary on some level.”

Though the identities of U.S. Steel’s other suitors remain unclear — Reuters has reported that the Luxembourg-based ArcelorMittal might be among them — two members of Congress have voiced concerns over the prospect of a foreign buyout. Senator J.D. Vance, who represents Cleveland Cliffs’ home state of Ohio, and Indiana Representative and Congressional Steel Caucus Vice-Chairman Frank Mrvan, D-Highland, both released statements framing American ownership of steel industry assets as a matter of national security. Vance asked the U.S. Steel’s leadership to rule out any foreign buyers.

Billett said that Vance and Mrvan’s apprehensions are reasonable.

“In all cases of acquisitions and foreign acquisitions, if there’s a strategic value to the industry that is of national interest — for example, we see this happening in certain tech spaces very commonly — then we want to make sure that we maintain some of the production and innovative capabilities to ensure that the country will be able to remain independent and and wouldn’t have to depend on foreign countries for critical goods and inputs,” he said. “And so to the extent that steel would fall into that category, then yes, it makes very good sense.”

Josh Spoores, a steel industry analyst with CRU Group, had a different view.

“I find it completely invalid,” he told the Post-Tribune, dismissing the statements as political posturing.

The real cause for public concern, Spoores said, is not foreign influence but monopoly power: If Cleveland-Cliffs acquires U.S. Steel, the consolidated company could effectively control 100% of the U.S. iron ore market, and dominate the production of other goods like automotive steel and food cans.

“What would steel buyers in the U.S. expect from this, if it goes forward? Higher prices, and probably a continued trend to offshore steel-intensive activity to other places that have more competition for supply, Mexico probably being the easiest one,” Spoores said.

The American steel industry has already seen a series of high profile acquisitions in recent years. In 2020, Cleveland-Cliffs acquired both the Ohio-based AK Steel and ArcelorMittal USA, which gave it ownership of the Indiana Harbor and Burns Harbor mills in Northwest Indiana. The following year, U.S. Steel acquired the Arkansas-based Big River Steel.

Cleveland-Cliffs’ proposed U.S. Steel buyout would require the approval of federal regulators.

Shana Wallace, a law professor at Indiana University Bloomington’s Maurer School of Law and a veteran of the United States Department of Justice’s Antitrust Division, said that the federal government would almost certainly step in to require Cleveland-Cliffs relinquish some of its assets if it does purchase U.S. Steel, in order to ensure that the industry remains competitive.

“I would have a hard time seeing them not requiring divestitures,” she told the Post-Tribune, “and if they don’t agree to divestitures, my guess is there would be a challenge.”

adalton@chicagotribune.com