Despite a steady stream of meetings and calls with U.S. officials, and three revamped proposals to assuage national security concerns, Nippon Steel (5401.T) has failed to garner approval from a powerful panel reviewing its $14.9 billion bid for U.S. Steel (X.N), a letter seen by Reuters shows.
The letter, sent Saturday, sets the stage for U.S. President Joe Biden, who has long opposed the deal, to block it. The Committee on Foreign Investment in the United States (CFIUS), which reviews deals for national security risks, has a Dec. 23 deadline to approve the deal, extend the review, or recommend Biden scuttle it.
If the agencies that make up the panel remain at loggerheads, as the letter states, they will refer the matter to Biden to take action.
The history of outreach since early September, including four in-person meetings with CFIUS, three phone calls, including one on Friday with the Treasury and Commerce department secretaries, as well as the three proposed mitigation agreements is contained in a letter dated Saturday sent to Nippon Steel by CFIUS that has not been previously reported.
"The Committee has not yet reached consensus on whether the mitigation measures proposed by the Parties would be effective... or whether they would resolve the risk to U.S. national security arising from the Transaction," CFIUS writes in closing.
"The President may take such action for such time as the President considers appropriate to suspend or prohibit a covered transaction that threatens to impair the national security," it adds.
The White House did not immediately respond to a request for comment. The Commerce Department, which is co-leading the review of the deal, and Treasury, which leads CFIUS, declined to comment.
Nippon Steel said it has "engaged in good faith with all parties to underscore how the transaction will bolster American economic and national security by countering the threats posed by China."
U.S. Steel said in a statement that Nippon Steel provides, "by far, the brightest future for U.S. Steel," adding that no other party can make the billions in investments Nippon Steel has promised to make.
"U.S. Steel will not-- and does not have the resources-- to do this on our own," it added. Shares of U.S. Steel fell 1% on the Reuters report.
HIGH-LEVEL OPPOSITION
The proposed tie-up has faced high-level opposition within the U.S. since it was announced a year ago, with both Biden and his incoming successor Donald Trump taking aim at it as they sought to woo union voters in the swing state of Pennsylvania, where U.S. Steel is headquartered. The president of the United Steelworkers Union opposes the tie-up.
The merger appeared fast-tracked to be blocked after the companies received an Aug. 31 letter from CFIUS, seen by Reuters, arguing the deal could hurt the supply of steel needed for critical transportation, construction and agriculture projects.
But Nippon Steel, countering that its investments, made by a company from an allied nation, would in fact shore up U.S. Steel's output, won a 90-day review extension. That gave CFIUS until after the November election to make a decision, fueling hope among supporters that the calmer political climate could underpin the deal's approval.
But CFIUS' 29-page letter Saturday shows the hopes were likely unfounded.
INVESTMENT PLEDGES IN THE CROSSHAIRS
This time, CFIUS doubled down on concerns about Nippon Steel's promises to invest $1.3 billion to revamp U.S. Steel's aging steel production facilities — Mon Valley Works and Gary Works BF 14 — which it says would have to be idled without Nippon Steel's funding.
The two facilities represent 26% of U.S. Steel's production capacity, raising questions about whether Nippon Steel would not invest in other facilities, CFIUS states. The committee also cast doubt on whether the Japanese firm, which has also announced an additional $1.6 billion in planned capital expenditure at U.S. Steel, would follow through on its investments.
"If the market situation in the United States deteriorates, through a reduction in demand, decrease in investment incentives, or other reasons, Nippon Steel could decide to use the capital currently earmarked for improvement of U.S. Steel’s aging assets for an alternative investment," CFIUS argued in the letter.
CFIUS lawyers, who were briefed on the contents of the letter by Reuters, said the investment issues raised by CFIUS are not tied to national security and could be resolved via a robust national security agreement.
Tatiana Sullivan, a former CFIUS official at the Defense Department, said the concerns cited by CFIUS "rest on a generalized inability to predict future market forces, rather than a specific threat that Nippon would intentionally harm U.S. national security by taking specific action to reduce U.S.-steelmaking capabilities."
In its latest Dec. 2 proposal to assuage national security concerns, which, if approved by CFIUS, would be enforceable, Nippon Steel commits to investments in both facilities and vows to maintain production capacity unless certain procedural and notice requirements are met, CFIUS states in the letter.
