Nippon Steel’s Deal a Niche Fit

By Kenneth Maxwell

Monday marked the quietest day of Tokyo stock trading this year, as the market was becalmed by the start of the traditional Obon summer holiday. But for Nippon Steel Corp., there are no dull days.

Nippon Steel will join its know-how in metallic coatings to BlueScope’s construction expertise.

Japan’s biggest steelmaker by output is just seven weeks away from formally merging with Sumitomo Metal Industries Ltd. to form the world’s second-biggest steelmaker by output after ArcelorMittal, and on Monday it announced a fresh foray into overseas markets.

Nippon Steel will form a $1.4 billion joint venture with Australia’s BlueScope Steel Ltd. that will make construction materials and steel sheets used in home appliances that will be sold in Southeast Asia and North America.

For cash-rich Nippon Steel, the deal allows it to meld its know-how in metallic coatings for everyday products like refrigerators with BlueScope’s expertise in the construction sector.

But the benefits are more immediately clear for BlueScope, which gained $540 million in cash from the deal. That pushed up its shares 35%, as the cash injection eases the company’s debt burden.

Nippon Steel’s shares closed up just 0.6% at ¥167 ($2.13), as clouds linger over key markets for steel in China and Europe. The Japanese company’s shares have lost a third of their value from the high of the year, set in mid-March. With Nippon Steel’s stock-market value at close to $15 billion, the verdict by investors on this deal was nice niche fit, but nothing that will dramatically move its profit needle.

“It appears much more favorable for BlueScope, as it solves some balance-sheet risks,” said CLSA analyst Jeremie Capron. For Nippon Steel, “it does also fit well within the company’s broader expansion strategy.”
The deal was broadly welcomed by analysts and provides yet another example of a Japanese giant going abroad for growth, this time to a part of the world where incomes are rising quickly. BlueScope’s existing networks in Southeast Asia should help get business there.

“Nippon Steel has been trying to expand its reach in the construction business, and with the deal, the company bought time to develop its business in countries including Thailand, Vietnam and Malaysia,” said UBS analyst Atsushi Yamaguchi.

–Brad Frischkorn and Miyuki Seguchi contributed to this article.

Leave a Reply