The Battle for United States Steel: Investors in a State of Uncertainty

by Warren Seah

The battle for United States Steel (ticker: X) has intensified, leaving investors uncertain about the best course of action.

On Monday afternoon, Pittsburgh-based Esmark made a significant move by announcing an all-cash bid of $35 per share for U.S. Steel, totaling about $7.8 billion. This bid followed U.S. Steel’s announcement that it was exploring strategic alternatives after receiving multiple offers for the entire company and its assets. One of the bidders, Cleveland-Cliffs (CLF), disclosed a cash-and-stock offer of $35 a share on Sunday.

Investors often prefer cash bids as they are not subject to the stock performance of the bidding company. However, U.S. Steel has deemed Cleveland-Cliffs’ offer inadequate and has yet to comment on the Esmark bid.

The news of these bids had a substantial impact on the stock market. Shares of the iconic steel company surged by nearly 37% on Monday, closing at $31.08. Similarly, Cliffs stock saw a gain of almost 9%. Moreover, U.S. Steel’s stock price rose an additional $2 following the emergence of the Esmark bid. In premarket trading on Tuesday, U.S. Steel’s stock is down by 0.9%, while both S&P 500 and Dow Jones Industrial Average futures have dipped around 0.6%.

Despite Monday’s significant gains, U.S. Steel’s stock price still remains approximately $5 below the bid price from both Cleveland-Cliffs and Esmark. This reveals that investors are grappling with uncertainty in evaluating and responding to these bids.

Market Concentration Concerns for Cleveland-Cliffs

According to KeyBanc analyst Philip Gibbs, there is a potential issue with market concentration in the case of Cleveland-Cliffs. In a recent report, Gibbs stated that the combined company of Cleveland-Cliffs and U.S. Steel would effectively control 100% of the U.S. iron ore market. This concentration raises some concerns.

Dominance in Automotive-Grade Steel Supply

Additionally, Cleveland-Cliffs currently holds the position of the largest supplier of automotive-grade steel in the USA. On the other hand, U.S. Steel ships a significant portion of its volumes to the automotive and transportation market in 2022. This highlights the importance of the automotive sector for both companies.

Exploring Esmark as an Investor

Moving on to Esmark, it is worth noting that investors may not be as familiar with this company. Primarily operating as a steel service center, Esmark buys steel from mills like U.S. Steel and processes it for customers. Steel service centers play a role similar to that of distributors within the industry.

Size and Comparison with Reliance Steel & Aluminum

While service centers can be sizable, it is interesting to observe that Reliance Steel & Aluminum (RS) boasts a market capitalization of almost $17 billion, surpassing the combined market capitalization of U.S. Steel and Cleveland-Cliffs. Reliance Steel & Aluminum is a publicly traded company, making its market cap information easily accessible. However, Esmark being privately held adds a layer of complexity to assessing its financial standing.

An Unexpected Bid from a Distributor

Esmark’s bid for one of the largest steel makers in the country comes as a bit of a surprise due to its status as a privately held distributor. Typically, steel distribution operations require less capital than full-scale steel-making processes. Nonetheless, with founder James Bouchard’s 40 years of experience in the steel business, including his time as a former executive at U.S. Steel, Esmark’s interest becomes clearer.

Financial Capability for the Bid

Addressing the financial aspect, an Esmark spokesperson assured that the company and James Bouchard have sufficient funds to support their bid. The statement was provided in an email.

You may also like

Leave a Comment