Why Japan is not giving up on fraught U.S. Steel deal
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[April 05, 2024] By
John Geddie, Katya Golubkova and Anton Bridge
TOKYO (Reuters) - Days after President Joe Biden joined his election
rival Donald Trump in voicing concern about a Japanese purchase of U.S.
Steel, the manufacturer began touting the benefits of the deal on
billboards near its factories from Alabama to Pennsylvania.
The billboards may be the most public signs of what some Japanese
officials say in private - that despite high hurdles, Nippon Steel could
still steer through the fraught $15 billion acquisition of the iconic
American manufacturer.
The deal may well hinge on whether regulators avoid election-year
politics by clearing the acquisition after Nov. 5, and, critically, on
whether Nippon Steel can win over the influential United Steelworkers (USW)
labour union.
Opposition from the Pittsburgh-based union has far-reaching implications
in an election year where Pennsylvania is seen as a key battleground
state.
The deal is effectively "on life support" after Biden's statement last
month that U.S. Steel must remain domestically owned and operated, said
David Boling, a former U.S. trade official in Japan who now works for
consulting firm Eurasia Group.
Investors seem to agree. Biden's comment, which followed Trump's pledge
to block the deal if he wins the Nov. 5 election, sent shares in both
companies tumbling. U.S. Steel shares last traded at $41.10, well below
the $55 per share price Nippon Steel has offered.
Nevertheless, it is still premature to declare the deal dead, four
senior Japanese officials speaking on condition of anonymity told
Reuters - a view shared by some analysts, consultants and lawyers. The
White House declined to comment on whether Biden's statement meant the
purchase could not proceed.
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Ongoing regulatory reviews in the U.S. may serve to buy time, thereby
delaying a final decision until after the election when the campaign
rhetoric has dissipated, the officials and others said.
Furthermore, Nippon Steel could still take steps to ringfence its U.S.
operations to ease concerns about foreign ownership.
And finally, the officials and others say, Nippon Steel could make its
way through thorny talks and yet win over the steelworkers.
Publicly, Tokyo has sought to distance itself from the deal, saying it
is a commercial matter - an approach widely seen as an attempt to play
down any controversy ahead of a summit between between Japanese premier
Fumio Kishida and Biden in Washington on April 10.
HIGH HURDLES
U.S. Steel's shareholders are due to vote on the acquisition on April
12, but with the firm's board having unanimously recommended
shareholders approve, analysts expect it to pass.
The next real hurdle is regulatory. The Committee on Foreign Investment
in the United States (CFIUS), a government panel that vets deals on
national security grounds, is reviewing the transaction. Nippon Steel
said the deal is also being examined by antitrust authorities in several
countries including the U.S.
An influential U.S. Senator on Tuesday urged the White House to probe
Nippon Steel's exposure to its strategic rival China, a connection the
firm has said is "very limited".
While by law CFIUS should complete deliberations within 90 days, in
practice it can take much longer via an increasingly common process
where parties withdraw and refile their applications, its latest annual
report shows.
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![](../images/040524PIX/busine93.jpg)
The logos of Nippon Steel Corp. are displayed at the company
headquarters in Tokyo, Japan March 18, 2019. Picture taken March 18,
2019. REUTERS/Yuka Obayashi/File Photo
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"There is unlikely to be a decision until after the election," said
Bill Reinsch, a former U.S. commerce official now advising the
Center for Strategic and International Studies. Biden's comments
"have not torpedoed the proposed acquisition," he added.
Two of the Japanese officials said the timing of the deal ahead of
the election has stifled debate about its economic merits and that a
delay could help calmer heads prevail.
But taking Biden at his word, getting around foreign ownership
concerns won't be easy.
Nippon Steel has been at pains to stress its "deep roots" in the
United States. It has had a presence there since the 1980s and has
4,000 employees in the country.
Nick Wall, a corporate M&A partner with Allen & Overy in Tokyo, said
U.S. regulators may grant conditional approval to the deal if the
firm makes changes to the management structure or ensures senior
personnel are U.S. nationals.
"There could be structures put in place to ensure it’s owned and
controlled by U.S. people, even if the economic control lies in
Japan," said Wall, who is not involved in the deal.
The sensitive defense sector provides one such example.
The American subsidiary of British defence contractor BAE Systems
does business with the U.S. government under a special agreement
where the influence and control of its foreign parent is restricted.
A Biden adviser said the policy question was "settled" by the
president and that if the deal is to include foreign partners it
would need a "different approach", declining to elaborate.
That puts the focus on the USW, which blasted the deal and both
companies for not consulting it before the deal was announced. In a
letter to its members on Tuesday, USW leadership called Nippon
Steel's latest pledges to support workers a "collection of empty
promises".
But a source close to Nippon Steel, who declined to be named due to
the sensitivity of the negotiations, said the union could be using
the political situation to get better terms and appears to remain
engaged in talks.
"There will be no problem to clear U.S. Steel shareholders meeting,
anti-trust examination, and CFIUS examination, if they are handled
normally," said Shinichiro Ozaki, senior analyst at Daiwa
Securities.
"But the most important thing, both before and after Biden's
statement, remains whether or not Nippon Steel can reach an
agreement with USW."
(Reporting by Katya Golubkova, Yuka Obayashi, John Geddie, Anton
Bridge, Tim Kelly, Yukiko Toyoda, Takemoto Yoshifumi in Tokyo,
Trevor Hunnicutt and Andrea Shalal in Washington and Lananh Nguyen
in New York; Editing by Sonali Paul)
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