How Japanese suitor misread politics with US Steel bid despite warning signs from Reuters

By Alexandra Alper, Yuka Obayashi and John Geddie

WASHINGTON/TOKYO (Reuters) – A month before Nippon Steel found that its $15 billion takeover of US Steel was about to be torpedoed by President Joe Biden, the Japanese company got a strong indication that things were getting worse.

On August 1, officials from the powerful Committee on Foreign Investment in the United States (CFIUS) told representatives of Japan’s biggest steelmaker and its US target that the committee had identified a potential national security risk, they told Reuters. two sources familiar with the negotiations.

CFIUS was concerned that the deal could reduce U.S. steelmaking capacity, disrupting critical industries such as transportation and infrastructure, officials told executives on the previously unreported call.

The warning from the US panel – which has the power to block foreign purchases on national security grounds – should have sounded the alarm at Nippon Steel, which was already battling criticism from a union and US politicians ahead of the November 5 election.

However, the Japanese steelmaker hoped it could still get the deal approved by patiently explaining the merits of the deal, according to Reuters interviews with two sources familiar with the talks, a company source and a top Nippon Steel executive.

According to one of the sources, in an Aug. 1 appeal follow-up meeting held at the Treasury Department, representatives of the companies emphasized to CFIUS the economic importance of Nippon Steel’s investments given US Steel’s struggling business. They left feeling their case had been heard, the two sources close to the talks told Reuters.

And in an Aug. 28 interview with Reuters, Nippon Steel’s chief negotiator, Takahiro Mori, expressed confidence that the deal is on track. He said he wanted to build a constructive long-term relationship with unions and had met about 1,000 people, including many workers, during five visits to the US since the offer was announced in December to explain its economic benefits. .

“The political power of the union will weaken. That is true now and of course after the election,” he told Reuters, adding that talks with CFIUS and other US regulators were “in progress”. A day later, Nippon Steel publicly promised to invest $1.3 billion to renovate US 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 ready to close the deal.

US Steel, Nippon Steel and CFIUS did not comment on details of the lawsuit as reported by Reuters.

“We do not believe this transaction creates national security concerns,” Nippon Steel said in a statement, without elaborating on the negotiations.

US Steel said in a separate statement that there was “no scenario” in which it could make the necessary investments without the Japanese company: “A transaction with Nippon Steel is the best way to ensure that US Steel will be able to thrive in future. .”

POTATO POLITICAL YARD

Nippon Steel tried to approach the politically connected United Steelworkers (USW) union before announcing it had agreed to buy US Steel, a company based in the pivotal state of Pennsylvania, during an election year.

On Nov. 20, the Japanese steelmaker requested a meeting with the USW, according to US Steel filings from January. But lawyers for the U.S. company rejected the request, saying the union had aligned itself with another suitor and the talks would risk breaching the confidentiality of a competitive bidding process, the filings show.

The approach is back.

When the Nippon Steel deal was made public on December 18, USW chief David McCall criticized the companies for keeping unions in the dark. In a statement the same day, the union leader accused US Steel of ignoring workers’ concerns while “selling out” to a foreign company.

He called on the US government to review the deal to see if it serves workers and national security interests.

Just three days after McCall’s call, Biden’s national economic adviser, Lael Brainard, said the takeover appeared to merit “serious scrutiny.”

The USW declined to comment on the merger process.

“In hindsight, it was obvious that (Nippon Steel) had to bring the union on board, but I don’t think they expected the union, and especially the union leader, to be as upset as he was,” Nick Wall said. an M&A partner at Allen & Overy who was not involved in the negotiations.

In the weeks after the deal was announced, both Biden and his Republican rival, Donald Trump, expressed 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 – the purchase of Nippon Steel was the elephant in the room.

McCall and his wife joined VIP guests such as Amazon (NASDAQ: ) founder Jeff Bezos and actor Robert De Niro at a lavish dinner that Biden hosted for Kishida, listening to live music by singer Paul Simon. Top executives from US Steel and Nippon Steel were not on the list of more than 200 guests released by the White House.

“LISTEN ONLY MODE”

As the political noise surrounding the deal grew, Nippon Steel still believed there was a way forward and the union was simply trying to get better terms, two sources close to the company told Reuters on condition of anonymity because of 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 that any administration would want to do that, he added.

But that logic went out the window on Aug. 31 when the CFIUS letter landed.

The letter argued the deal posed a risk without offering any discussion of ways to alleviate officials’ concerns and gave the parties until Sept. 4 to respond, according to the two sources familiar with the discussions.

In a Sept. 1 call, lawyers working on the deal pressed CFIUS officials about why they were given so little time, the sources said.

“We were instructed to be in listening mode,” a CFIUS official responded, an ominous sign as sources in the Biden administration were telling the two companies that the White House was on the way to blocking 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 September 3.

The letter, reviewed by Reuters, said it expected the 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 that Biden was preparing to block the deal.

“In the future, this deal will probably be seen as a textbook case of how a business failed to understand politics,” said David Boling, a former US trade official now at Eurasia Group.