How a Japanese suitor misread politics with U.S. Steel bid, despite
warning signs
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[September 10, 2024] By
Alexandra Alper, Yuka Obayashi, John Geddie
WASHINGTON/TOKYO (Reuters) -A month before Nippon Steel discovered its
$15 billion takeover of U.S. Steel was on the brink of being torpedoed
by President Joe Biden, the Japanese company received a strong hint that
things were taking a turn for the worse.
On Aug. 1, officials from the powerful Committee on Foreign Investment
in the United States (CFIUS) told representatives of Japan's biggest
steelmaker and its U.S. target that the committee had identified a
potential national security risk, two sources familiar with the
negotiations told Reuters.
CFIUS was concerned that the deal could reduce U.S. steel production
capacity, disrupting critical industries like transportation and
infrastructure, the officials told the executives in the call, which has
not previously been reported.
The warning from the U.S. committee - which has the power to block
foreign acquisitions on national security grounds - should have rung
alarm bells at Nippon Steel, which was already fighting criticism from a
labor union and U.S. politicians ahead of Nov. 5 elections.
Yet, the Japanese steelmaker hoped it could still win approval for the
deal by patiently explaining its business merits, according to Reuters'
interviews with two sources with knowledge of the discussions, one
company source and a top Nippon Steel executive.
In an Aug. 19 follow-up meeting to the Aug. 1 call held at the Treasury
Department according to one of the sources, the companies'
representatives stressed to CFIUS the economic importance of Nippon
Steel's investments given U.S. Steel's struggling business. They left
feeling their case had been heard, the two sources close to the talks
told Reuters.
And in an interview on Aug. 28 with Reuters, Nippon Steel's chief
negotiator Takahiro Mori expressed confidence the deal was on track. He
said he wanted to build a constructive long-term relationship with the
unions and that he had met around 1,000 people, including many workers,
during five U.S. visits since the offer was announced in December to
explain its economic benefits.
"The political power of the union will weaken. That's true now and of
course after the election", he told Reuters, adding that talks with
CFIUS and other U.S. regulators were "progressing". A day later, Nippon
Steel publicly vowed to invest $1.3 billion to refurbish U.S. Steel's
aging facilities.
But on Aug. 31, CFIUS sent the two merging partners a 17-page letter
detailing its concerns and giving them just one business day to respond.
Reuters and other media reported last week that President Joe Biden was
poised to kill the deal.
U.S. Steel, Nippon Steel and CFIUS did not comment on the details of
process as laid out by Reuters.
"We do not believe this transaction creates any national security
concerns," Nippon Steel said in a statement, without elaborating on the
negotiations.
U.S. Steel said in a separate statement that there was "no scenario" in
which it could make necessary investments without the Japanese company:
"A transaction with Nippon Steel is the best avenue to ensure that U.S.
Steel will be able to thrive well into the future."
POLITICAL HOT POTATO
Nippon Steel had tried to approach the politically-connected United
Steelworkers union (USW) before it announced it had agreed to purchase
U.S. Steel, a company based in the pivotal swing state of Pennsylvania
during an election year.
On Nov. 20, the Japanese steelmaker requested a meeting with USW,
according to U.S. Steel filings in January. But lawyers for the American
firm denied the request, saying the union had aligned with another
suitor and talks would risk breaking the confidentiality of a
competitive bidding process, the filings said.
The approach backfired.
When Nippon Steel's deal was made public on Dec. 18, USW head David
McCall slammed the companies for keeping unions in the dark. In a
statement the same day, the union leader accused U.S. Steel of ignoring
workers' concerns while "selling out" to a foreign company.
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Nippon Steel logo is displayed at the company's headquarters in
Tokyo, Japan April 1, 2024. REUTERS/Issei Kato/File Photo
He urged the U.S. government to scrutinize the deal to see if it
served workers and national security interests.
Just three days after McCall's appeal, Biden's national economic
advisor Lael Brainard said the takeover appeared to deserve "serious
scrutiny".
USW declined to comment on the merger process.
"In hindsight it was obvious (Nippon Steel) needed to get the union
on board but I don't think they expected the union, and in
particular the leader of the union, to get as upset as he did," said
Nick Wall, an M&A partner at Allen & Overy, who was not involved in
the negotiations.
In the weeks after the deal announcement, both Biden and his
Republican rival Donald Trump voiced opposition to the merger.
When Japanese Prime Minister Fumio Kishida headed to Washington DC
in April - the first state visit by a Japanese leader in nine years
- Nippon Steel's acquisition was the elephant in the room.
McCall and his wife joined VIP guests such as Amazon founder Jeff
Bezos and actor Robert De Niro at a lavish dinner Biden arranged for
Kishida, listening to live music by singer Paul Simon. U.S. Steel
and Nippon Steel top executives were not on the list of more than
200 guests released by the White House.
'LISTEN ONLY MODE'
As the political noise around the deal grew louder, Nippon Steel
still believed there was a path forward and that the union was
simply trying to extract better terms, two sources close to the
company told Reuters, requesting anonymity due to the sensitivity of
the discussions.
In May, chief negotiator Mori told Reuters he believed that, once
the election was over, the president would assess the economic
merits of the deal. Blocking it could upset one of America's closest
allies and it seemed unlikely any administration would want to do
that, he added.
But that logic went out of the window on August 31, when the CFIUS
letter landed.
The letter argued the transaction posed a risk without offering any
discussion of ways to assuage officials' concerns and gave the
parties until Sept. 4 to respond, according to the two sources
familiar with the discussions.
In a call on Sept. 1, attorneys working on the deal pressed CFIUS
officials about why they had been given so little time, the sources
said.
"We have been instructed to be in listen only mode," a CFIUS
official replied, an ominous sign as sources inside the Biden
administration were telling the two companies the White House was
about to block the takeover, the people said.
The companies began frantically drafting a response, correcting what
they perceived as factual inaccuracies, proposing mitigation and
arguing to save the deal in a 100-page letter delivered on Sept. 3.
The letter, reviewed by Reuters, said they expected USW to be more
"forward-leaning" in talks with the companies.
The next day, however, news broke that the White House was close to
announcing Biden was preparing to block the deal.
"In the future, this deal will probably be considered as a textbook
case of how a business failed to understand politics," said David
Boling, a former U.S. trade official now at Eurasia Group.
(Reporting by Alexandra Alper and Trevor Hunnicutt in Washington;
John Geddie, Katya Golubkova, David Dolan, Yuka Obayashi, Kaori
Kaneko and Daniel Leussink in Tokyo; Editing by Lisa Jucca)
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