Nippon Steel’s long-delayed merger with US Steel has concluded a fraught chapter in industrial dealmaking, but some investors of Nippon Steel remain concerned about how the Japanese giant will finance the acquisition and planned capital expenditures.
The “golden share” or stake set aside for the US government in the combined company has also caused some investors to worry about the degree of control the government can have over the company.
The “golden share” gives the government a say in key decisions and the ability to appoint board members—an unusual move outside of bailouts.
Shares of Nippon Steel rose as much as 5% in early Tokyo trading on Monday before settling at 2.4% as investors remain cautious.
By Monday’s close, the gain had reduced to only 1.5%.
“Investors have welcomed the resolution of uncertainty surrounding the deal,” said Shinichiro Ozaki, senior analyst at Daiwa Securities, in a Reuters report.
“Overall, the agreement appears relatively reasonable in both investment size and timeframe,” he said, noting the acquisition is central to Nippon Steel’s medium- to long-term growth strategy.
Investor anxiety over financing strategy persists
Under the agreement, Nippon Steel will invest $14 billion over the next several years, including roughly $11 billion by 2028.
A key short-term concern for investors in the Japanese steelmaker is how it will finance the all-cash acquisition and the significantly increased investment commitments, which now span upgrades to existing facilities and the construction of a new steel mill.
“For now, the main concerns are the size of the investment, how it will be financed, and over what period the investment will be recouped, all of which remain vague,” said Ryunosuke Shibata, an analyst at SBI Securities Co. in a Bloomberg report.
He added that it is unlikely the company will fund the full amount through debt, given the impact on credit ratings and current high US interest rates.
Shibata estimated the company may raise as much as 1 trillion yen (about $6.9 billion) in equity to support the acquisition and associated investments.
Ozaki, however, said that while the risk of a capital increase hasn’t completely receded, it may be less severe than expected.
Deal premium and the government’s ‘golden share’ also under investor scrutiny
Nippon Steel is paying $55 a share for US Steel, representing a 142% premium to the target’s market price before the deal was announced last year.
Critics have argued that the premium is excessive and risks shareholder value, especially given the rising cost of the promised investments.
Activist investor 3D Investment Partners has urged shareholders to vote against the reappointment of Nippon Steel’s top executives, citing fears of “irreversible” value destruction.
However, others see the acquisition as central to Nippon’s long-term strategy.
Skepticism also abounds over the golden share.
Ozaki, however, sought to downplay the management risk linked to the golden share.
Nippon Steel anticipates growth in the US market for high-end products, making production cuts and job reductions unlikely.
Nippon Steel has pitched the deal as part of a strategy to grow its share of the high-end steel market in the United States, particularly in automotive and infrastructure applications.
The company expects synergies from technological sharing and better access to US clients and contracts.
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