Cleveland-Cliffs: Cleveland-Cliffs, a company based in Ohio, is contemplating acquiring its chief rival, U.S. Steel, in a deal worth $7.3 billion. This move would result in the accumulation of more debt for Cleveland-Cliffs, a company that is still paying off its existing debt from previous acquisitions.
Cleveland-Cliffs’ Journey: From Iron Ore Miner to Steel Producer
Cleveland-Cliffs underwent a significant transformation, transitioning from a $2 billion iron ore miner to a $23 billion integrated steelmaker. This change occurred after acquiring AK Steel for $1.1 billion and ArcelorMittal USA for $1.4 billion in 2020. The company’s debt currently stands at $3.9 billion, a decrease from the previous year’s $5 billion and $5.3 billion following the 2020 acquisitions.
The Proposed Acquisition and Debt Concerns
Cleveland-Cliffs is eyeing a cash-and-stock deal to purchase its main competitor, U.S. Steel. This acquisition would considerably increase its debt burden. To facilitate this acquisition, Cleveland-Cliffs has approached leading U.S. and international banks for necessary debt financing and expresses confidence in arranging the funds.
Financial Standing and Analyst Observations
As of the second quarter, Cleveland-Cliffs possesses assets totaling $18.3 billion, with only $34 million in cash reserves. While the company managed to reduce its debt by $1.4 billion in the last three years, some analysts are concerned about the current debt load. Metrics like net debt relative to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and Earnings Before Interest and Taxes (EBIT) relative to interest expenses have raised questions about the weight of interest payments on the company.
Risks and Caution in Financial Assessment
Financial analysis company Simply Wall Street points out that while the debt ratios aren’t alarming, the interest payments might become burdensome, especially considering Cleveland-Cliffs’ 80% decrease in EBIT last year. The company has generated reasonable free cash flow from its EBIT but lacks significant growth. Simply Wall Street emphasizes the potential risk the company’s balance sheet poses and suggests cautiousness regarding its stock and liquidity.
Prospective Improvement in Cash Flow
Cleveland-Cliffs aims to boost its free cash flow by acquiring U.S. Steel, projecting an increase from $1.4 billion to $3.76 billion this year. This expected growth in cash flow could aid the company in better managing its debt obligations going forward.
Conclusion: Keeping an Eye on Debt and Financial Strategy
Cleveland-Cliffs’ potential acquisition of U.S. Steel offers growth opportunities but also raises concerns about the company’s already-existing debt burden. While the company predicts enhanced free cash flow through this deal, shareholders and investors are advised to closely monitor the impact on the company’s financial health and strategic decisions.