The takeover of America’s second-largest steel manufacturer, U.S. Steel (NYSE:X), will certainly not be a cakewalk for the potential bidders. Among the two known bidders are Cleveland-Cliffs (NYSE:CLF), the number one steel maker, and privately owned Esmark Inc. Both companies have offered to buy U.S. Steel for $35 per share, valuing the company at roughly $7.3 billion. X stock has gained 21.5% so far this year, thanks to the buyout news.
U.S. Steel produces steel that is used to make auto fenders, food cans/tins, and batteries for electric vehicles (EVs). The company has over a century-long history of producing steel and boasts some of the largest and most state-of-the-art manufacturing plants in North America. In terms of market share, CLF holds the foremost position, followed by steel manufacturers X, Nucor (NYSE:NUE), and Steel Dynamics (NASDAQ:STLD).
U.S. Steel is in the process of formally evaluating multiple unsolicited offers for the takeover.
Why is Cleveland Cliffs’ Offer in Trouble?
As the foremost producer of sheet steel in the country, CLF’s attempts to acquire the second-largest maker puts the company in a challenging position. The company will have to undergo a great deal of scrutiny from regulatory authorities concerning the monopolistic nature of the acquisition. A combination of the two entities would result in annual production of approximately 26 million tons and a turnover of roughly $40 billion. Moreover, Cleveland Cliffs would become the only American supplier of tinplate used in food cans and the largest supplier of automotive sheet steel in the U.S. Plus, it would end up becoming the only American supplier of iron ore in the U.S.
Nonetheless, Cleveland Cliffs CEO Lourenco Goncalves expressed that the acquisition would lead to a more cost-effective and inventive steel provider. Despite this, U.S. Steel rejected Cleveland-Cliffs’ combination of cash and stock, calling it “unreasonable.”
Esmark has Relatively Fewer Challenges
Esmark is an industrial conglomerate engaged in coating steel with tin for use in food cans. Esmark stated that it has been preparing an apt buyout proposal for U.S. Steel for months. Shares of X skyrocketed when Esmark offered to buy the company in an all-cash deal. Remarkably, Esmark CEO and majority owner James Bouchard proclaimed that he has roughly $10 billion in cash poised for the purpose of executing the acquisition.
Esmark will probably not face severe anti-competitive pressure from the authorities or the steel buyers. Unlike Cleveland-Cliffs, the company does not possess any iron ore mines or engage in steel production. Its sole involvement in this sector pertains to the manufacturing of steel-coated tins.
Is U.S. Steel a Buy, Sell, or Hold, as per Analysts?
Wall Street has conflicting views on U.S. Steel’s acquisition. Citi analyst Alexander Hacking believes Cleveland Cliffs is the only logical buyer for U.S. Steel.
Hacking has a Hold rating on X stock with a price target of $30, implying shares are almost fully valued at current levels. On the other hand, Morgan Stanley analyst Carlos De Alba believes Cleveland Cliffs could face heightened regulatory pressure for the deal.
Overall, U.S. Steel stock has a Moderate Sell consensus rating on TipRanks. This is based on four Holds and three Sell ratings. The average U.S. Steel price target of $23.05 implies 23.8% downside potential from current levels.
