Nippon Steel's US setback a wake-up for Japan Inc's foreign forays

By Kane Wu, Yantoultra Ngui and Miho Uranaka

HONG KONG/TOKYO (Reuters) -Japanese firms are set to scrutinise overseas deals more intently after U.S. resistance to Nippon Steel's $15 billion U.S. Steel purchase, advisers said.

Any U.S. move to block Japan's Nippon Steel would be "very unsettling", one of the front-runners to become the next Japanese premier told Reuters, and could dent trust between the allies.

Reuters reported this week that the White House is close to announcing President Joe Biden will block the $15 billion U.S. Steel deal on national security grounds.

Both buyers and sellers of assets were already taking more time analysing political trends and scrutinising whether a target is in an industry that might trigger state intervention, one Tokyo-based banker told Reuters.

As one of Washington's closest allies, Japan has not had any issues with U.S. regulators in recent years and companies in the country have been assessing assets abroad given a falling yen and stagnant economy at home.

But last week, the Committee on Foreign Investment in the U.S. (CFIUS) said in a letter to Nippon Steel and U.S. Steel that their proposed deal would create national security risks by hurting the steel supply needed for critical U.S. projects.

CFIUS has stepped up its scrutiny since Chinese companies went on a U.S. shopping spree about a decade ago, snapping up assets such as the Waldorf Hotel and tech firm Ingram Micro.

Some advisers said that the Nippon Steel deal was complicated by the U.S. presidential election, with many Republican and Democratic lawmakers voicing opposition to it, but that this could subside after November's vote.

"Whoever wins the election will be under pressure from the financial markets to accept these deals," said Euan Rellie, New York-based co-founder and managing partner of investment advisory firm BDA Partners.

Nevertheless, Japanese companies would be "really, really concerned and shaken up" by the Nippon Steel situation, said a Tokyo-based senior mergers and acquisitions (M&A) banker, who requested anonymity due to the sensitivity of the matter.

If the Nippon Steel deal collapses, break-up fees might increase and buyers will become more cautious, they added.

Outbound M&A from Japan to the U.S., in particular, is up nearly 160% to $32.1 billion so far this year, accounting for 71.4% of Japan's total outbound M&A deal value, versus 38.7% a year earlier, Dealogic data shows.

"The CFIUS decision in this case should not change the policy trend of friend-shoring or Japan's status as a key ally country in the CFIUS review process," said Weiheng Chen, a senior partner at law firm Wilson Sonsini.

Japan saw a 45% jump in outbound acquisition deal value last year to $65.8 billion, the Dealogic data shows, as companies looked to tap alternate revenue streams to soften the impact of a deflationary domestic economy.

Nippon Steel's proposed takeover of U.S. Steel would have been the third-biggest acquisition of a U.S. firm by Japan Inc in a decade after the $21-billion takeover of Speedway in 2020, and $16 billion of Beam in 2014, the data showed.

Rellie said that blocking cross-border M&A would be "bad economics and bad policy" as a "tidal wave" of Asian clients paying up for U.S. and European assets had been forecast.

(Reporting by Kane Wu in Hong Kong, Yantoultra Ngui in Singapore and Miho Uranaka in Tokyo; Editing by Sumeet Chatterjee and Alexander Smith)