The value of United States Steel Corporation (US Steel) stock jumped 28% on Tuesday after the company announced that it had rejected a takeover bid from Cleveland-Cliffs Inc. and stated that it would instead consider “strategic alternatives” to maximize shareholder value.
US Steel Witnesses Remarkable 28% Stock Surge
Cleveland-Cliffs, a major iron ore pellet producer, had offered to acquire US Steel for approximately $1.5 billion in an all-stock deal. However, US Steel firmly rejected the offer, stating that it “significantly undervalues the company and fails to reflect the company’s upside potential.”
In response to Cleveland-Cliffs’ bid, US Steel said that its board of directors unanimously determined the offer was opportunistic and grossly inadequate.The company added that it is not currently in discussions regarding a potential transaction with any third party.
Following US Steel’s unequivocal rejection of the offer, its stock value rallied strongly on Tuesday as investors grew more optimistic about the potential for US Steel to remain independent or to find an alternative buyer willing to pay a higher valuation.
The 28% single-day surge in US Steel’s stock price was its largest percent gain since October 2008. The jump brought US Steel’s market capitalization to around $3.1 billion.
As it rebuffed Cleveland-Cliffs’ bid, US Steel indicated that it would look at “all options” to maximize value. In a press release, the company said that it would focus on “strategic alternatives that create shareholder value.”
Potential alternatives include soliciting acquisition interest from other steel producers, private equity firms, or strategic investors that may offer a richer premium. Issuing dividends, buying back stock, or selling underperforming assets could also be under consideration.
US Steel’s board has not set a definitive timeline for exploring alternatives. However, the company faces pressure from activist shareholders to act quickly amid a challenging operating environment.
Some analysts have expressed doubt that US Steel would be able to find an acquirer willing to pay substantially more than Cleveland-Cliffs’ rejected bid.
Cleveland-Cliffs’ offer amounts to about 5.9x US Steel’s 2021 EBITDA and about 78% of its enterprise value. Given the cyclical headwinds and competitive pressures facing the steel industry, analysts said that it might be difficult for US Steel to squeeze out a significantly higher takeover valuation.
Challenges Loom as US Steel Strives for Value Maximization Amidst Uncertainty
However, the company’s decisive rejection of Cleveland-Cliffs indicates that it sees a path to achieving greater value, whether through a buyer with deeper pockets or via strategic moves as a standalone company.
According to UBS analyst Andreas Bokkenheuser, “U.S. Steel’s board and management team appear confident that they can drive higher value from the company’s assets than what Cleveland-Cliffs offered.”
US Steel finds itself at a crucial juncture in its history. While rejecting Cleveland-Cliffs’ takeover bid reflects the management’s confidence in improving fortunes, the company must address significant competitive and macroeconomic headwinds.
In conclusion, with its stock price surging parallel to the speculation on strategic alternatives, US Steel now faces pressure to carefully evaluate options, communicate transparently with shareholders, and ultimately execute on a strategy that unlocks greater long-term value. Although the path forward remains clouded in uncertainty, US Steel’s management and board have signaled that they are prepared to take bold actions which they believe will put this stalwart steelmaker on a more solid footing for the future.