Investing.com -- Jefferies has lowered its rating on Nippon Steel Corp (TYO:5401) stock to Underperform, citing multiple financial and operational risks tied to its planned acquisition of United States Steel (NYSE:X).
The brokerage firm also cut its price target to 2,400 Japanese yen from 3,200 yen, reflecting a potential 16% downside from current levels.
The downgrade follows U.S. President Donald Trump’s executive order on June 13 allowing Nippon Steel to proceed with its $14.1 billion all-cash acquisition of U.S. Steel. Jefferies warned that the transaction will pressure Nippon Steel’s financials in the near term as it may need to lower earnings guidance and raise fresh equity.
To address antitrust concerns and accelerate regulatory approval, Nippon Steel agreed to sell its entire 50% stake in the profitable Calvert, Alabama joint venture with ArcelorMittal (NYSE:MT) for $1, resulting in an expected loss of approximately 230 billion yen.
"We’d expect Nippon to include this loss in its FY3/26 earnings guidance, and lower our NP estimates significantly below guidance," analyst Thanh Ha Pham said in a Tuesday note.
Jefferies expects Nippon Steel will need to raise between 300 billion yen and 500 billion yen in equity to reduce leverage and comply with its targeted net debt-to-equity ratio of 0.7x by the end of FY3/26. The company is currently funding the acquisition with bridge loans.
But the risks extend beyond the initial deal financing. To secure U.S. regulatory approval, Nippon Steel pledged to increase its investment in U.S. Steel from $2.7 billion to $11 billion by 2028.
Thanh Ha Pham points out that recent reports have suggested "that Nippon would further invest multi-billion dollars on top of this to building a new steel mill.”
Longer-term challenges are also emerging. As part of the national security agreement, Nippon Steel agreed to grant the U.S. government a golden share, which significantly limits the company’s flexibility.
According to the analyst, "U.S. Steel’s charter will list nearly a dozen activities the company cannot undertake without government approval, including idling plants or raw material procurement."
He also flagged concerns over Nippon Steel’s limited experience in integrating large-scale overseas acquisitions without a partner. While the Calvert and AM/NS India projects succeeded with ArcelorMittal’s support, its standalone acquisition of G/GJ Steel in Thailand turned loss-making soon after closing.