What happened
Shares of Cleveland-Cliffs(NYSE: CLF) were rising in Monday trading, rallying about 10% as of 2:34 p.m. ET.
It's no secret as to why there is a large move in the stock today. Over the weekend, Cleveland-Cliffs (CLF) went public with its $35 per-share, half-cash, half-stock offer to acquire U.S. Steel(NYSE: X). Reportedly, the offer was made back on July 28. But after U.S. Steel sought to delay a decision to apparently conduct due diligence and seek other strategic options, Cleveland-Cliffs decided to go public in order to get shareholders to force the board's hand.
Usually when a company makes an acquisition offer -- and at a substantial 43% premium, no less -- a stock goes down. However, investors apparently see the benefits of the tie-up and also apparently see a good chance this proposal makes it through the regulatory process.
So what
Over the weekend, Cleveland-Cliffs went public with its acquisition offer for U.S. Steel, whose board of directors does not seem to wish to be acquired, or at least for that price. U.S. Steel wanted Cleveland-Cliffs to sign a non-disclosure agreement (NDA) which would allow it to further assess the merits of the CLF stock component of the offer, but that was rejected by Cleveland-Cliffs, which subsequently went public with their proposal.
On CNBC this morning, Cleveland-Cliffs CEO Lourenco Goncalves explained that the proposed NDA entailed an 18-month diligence period, which he found untenable and amounted to delay tactics, and that's why the company went public with its offer.
Goncalves also put forward a strong rationale for why the deal would pass regulators, even though the acquisition would lead to a substantial consolidation of U.S. steelmakers. First, in conjunction with the presentation, Goncalves published a letter from the United Steelworkers Union (USW) expressing support for the deal. Not only that, but the USW actually said it would not support any other company except Cleveland-Cliffs acquiring U.S. Steel. The union pointed to Cleveland-Cliffs' recent acquisitions of AK Steel and ArcelorMittal's U.S. operations, after which Cleveland-Cliffs not only didn't cut any jobs but actually increased them.
Furthermore, Goncalves made the point that while the transaction would concentrate U.S. suppliers, steel operates in a global market, with imports being the company's toughest competitor. While the combined company would be a massive player in the U.S., it would only be the 10th-largest global player if the deal passes. Management also pointed to $500 million in cost synergies, which Goncalves later called "conservative" as a result of the deal. These synergies would likely come from cuts at the executive level, as well as the complementary optimized operating capabilities of both companies -- not cuts to steelworkers.
Image source: Getty Images.
Now what
While companies that propose acquisitions usually sell off, it was interesting that Cleveland-Cliffs stock actually rose on the deal-offer news. While investors should perhaps expect a bit of a fight from U.S. Steel, it appears the letter from the USW endorsing Cleveland-Cliffs is convincing investors that the deal would eventually be approved by shareholders, get through the regulatory process, and reap the financial benefits Cliffs outlined in its presentation.
This Cleveland-Cliffs-U.S. Steel drama will certainly be interesting to monitor throughout the rest of the summer and fall.
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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
