How a Japanese suitor misinterpreted politics by bidding on US Steel despite warning signs

Authors: Alexandra Alper, Yuka Obayashi and 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 got a clear signal that things were taking a turn for the worse.

On Aug. 1, officials at the influential Committee on Foreign Investment in the United States (CFIUS) told representatives of Japan’s largest steelmaker, which is also its U.S. target, that the committee had identified a potential national security threat, two sources familiar with the negotiations told Reuters.

CFIUS is concerned that the deal could limit U.S. steel production capacity, disrupting important industries like transportation and infrastructure, a CFIUS official told executives in an undisclosed call.

The warning from a U.S. commission that has the power to block foreign takeovers on national security grounds should have worried Nippon Steel, which has already faced criticism from labor unions and U.S. politicians ahead of the Nov. 5 election.

Still, the Japanese steelmaker was hopeful it could win approval for the deal if it patiently explained its business advantages, according to Reuters interviews with two sources with knowledge of the talks, one inside the company and a top Nippon Steel executive.

During the Aug. 19 meeting, a follow-up to an Aug. 1 conference call at the Treasury Department, according to one source, company representatives stressed to CFIUS the economic significance of Nippon Steel’s investment, given U.S. Steel’s business problems. They left feeling their case had been heard, two sources close to the talks told Reuters.

In an Aug. 28 interview with Reuters, Nippon Steel chief negotiator Takahiro Mori expressed confidence that the deal was on the right track. He said he wanted to build a constructive, long-term relationship with unions and that he had met with about 1,000 people, many of them employees, during five visits to the U.S. since the offer was announced in December to explain its economic benefits.

“The union’s political power 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 pledged to invest $1.3 billion to renovate aging U.S. Steel plants.

But on Aug. 31, CFIUS sent the two merger 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 block the deal.

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

“We do not believe this transaction poses any national security concerns,” Nippon Steel said in a statement, without providing details about the negotiations.

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

POLITICAL HOT POTATO

Nippon Steel tried to establish contact with the politically connected United Steelworkers (USW) union before announcing it had agreed to buy US Steel, a company based in the key election-year state of Pennsylvania.

On Nov. 20, the Japanese steelmaker requested a meeting with the USW, according to U.S. Steel documents from January. But lawyers for the American company rejected the request, saying the union had endorsed another competitor and the talks risked violating the confidentiality of the tender, the documents said.

This approach did not produce any results.

When the Nippon Steel deal was made public on Dec. 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 U.S. government to carefully review the agreement to ensure it serves the 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 consideration.”

USW declined to comment on the merger process.

“In retrospect it was obvious that (Nippon Steel) had to get the unions’ support, but I don’t think they expected the union, and especially its leader, to be as upset as they were,” said Nick Wall, a mergers and acquisitions 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 traveled to Washington in April, the first state visit by a Japanese leader in nine years, the takeover of Nippon Steel was taboo.

McCall and his wife joined VIP guests including Amazon founder Jeff Bezos and actor Robert De Niro at a lavish dinner hosted by Biden for Kishida, which featured live music from Paul Simon. Top executives from U.S. Steel and Nippon Steel were not among the list of more than 200 guests released by the White House.

LISTEN ONLY MODE

Even as the political noise surrounding the deal grew louder, Nippon Steel officials continued to believe there was a way forward and that the union was simply trying to force better terms, two sources close to the company told Reuters, requesting anonymity because of the sensitive nature of the discussions.

Mori, the chief negotiator, told Reuters in May that he believed the president would assess the economic merits of the deal after the election. Blocking it could upset one of America’s closest allies, and it seems unlikely any administration would want to do that, he added.

But that logic went out the window on August 31 when the CFIUS letter arrived.

The letter argued the deal posed risks but did not propose any means of allaying officials’ concerns, according to two sources familiar with the discussions, and the parties were given until Sept. 4 to respond.

In a Sept. 1 phone call, lawyers working on the deal pressed CFIUS officials to explain why they had been given so little time, the sources said.

“We have been instructed to use listen-only mode,” the CFIUS official responded, an ominous sign since Biden administration sources had told both companies the White House intended to block the takeover, the people said.

The companies frantically began writing a response, in which in a 100-page letter delivered on September 3, they corrected what they saw as factual inaccuracies, offered leniency and argued for saving the deal.

The letter, obtained by Reuters, shows that they expect a “more forward-looking” approach from the USW in talks with companies.

The next day, however, news broke that the White House was close to announcing that Biden intended to block the deal.

“This deal will probably go back to being a textbook example of a company failing to understand politics,” said David Boling, a former U.S. trade official who now works for 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)