Nippon Steel to Take Control of Nisshin to Weather China Glut

  • Nippon seeks 51% via tender offer and issue of new shares
  • Warns business conditions severe until China clears surplus

Nippon Steel & Sumitomo Metal Corp., Japan’s largest steelmaker, said it will take majority control of the nation’s No. 4 mill, Nisshin Steel Co., as the industry consolidates in the face of a global supply glut.

Citing a “rapid deterioration of the business environment” due to overcapacity in China, Nippon Steel will take a 51 percent stake in Nisshin via a combination of a tender offer and the sale of new shares by the smaller company, according to a statement by the two firms. Nippon Steel will only take up the new shares in Nisshin if its tender offer fails to win it majority control, the statement said.

Nisshin has a market value of 159.5 billion yen ($1.47 billion) while Nippon Steel, also the world’s most valuable steelmaker, is worth around 2.1 trillion yen.

The companies said that China’s economic slowdown has created about 400 million metric tons a year of excess capacity, with roughly 100 million tons of surplus steel products -- equivalent to Japan’s total annual crude steel production -- exported to countries around the globe. Japan is the world’s No. 2 producer.

“While there are indications that the excess of production capacity in China will be corrected, it will likely take considerable time,” the companies said. In the interim, “the business environment surrounding the steel business will become even more severe.”

12% Premium

Nippon Steel currently owns 8.3 percent of Nisshin. Nippon will seek to buy 46.9 million shares via the tender, while Nisshin is prepared to sell 95.7 million in new shares at 1,620 yen apiece -- a 12 percent premium over its closing price Friday. Nisshin has 109.8 million shares outstanding.

The tender will take place in February 2017 and Nisshin would retain its Tokyo listing, according to the statement. The deal was first announced in February of this year.

Combining the two companies would leave Japan with three blast-furnace steelmaking groups that use iron ore and coking coal as their raw materials, together with JFE Holdings Inc. and Kobe Steel Ltd. The nation had six blast-furnace steelmakers in 2000.

Formed in 2012 through the merger of Nippon Steel Corp. and Sumitomo Metal Industries Ltd., Nippon Steel itself is the product of consolidation due to tougher competition from Asian rivals.

Nippon Steel fell 2.1 percent to 2,165 yen in Tokyo trading, extending its decline this year to 10 percent. The announcement was made after the market closed. Nisshin declined 1.8 percent to 1,452 yen.

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