UPDATE 7-Biden to block U.S. Steel sale to Japanese buyer, source says

Adds U.S. Steel shares, Japan ministry, analyst quotes, details; paragraphs 5,11, 25-27

By David Shepardson, Tim Kelly and Katya Golubkova

WASHINGTON/TOKYO, Jan 2 (Reuters) - U.S. President Joe Biden is poised to officially block Nippon Steel's 5401.T proposed $14.9-billion purchase of U.S. Steel X.N, a person familiar with the matter said on Friday, dealing a probably fatal blow to the contentious merger plan.

The Committee on Foreign Investment in the United States (CFIUS) spent months reviewing the deal for national security risks but referred the decision to Biden in December, after failing to reach consensus.

His decision could come as soon as Friday, despite the concerns of some of his senior advisers that it could hurt ties with key Asian ally Tokyo, according to the Washington Post, which first reported the news.

The newspaper cited two administration officials who were not authorized to speak publicly about the matter.

Shares of U.S. Steel were down 7.8% in pre-market trade following the reports. Japan's stock market was closed on Friday for a public holiday.

Spokespersons for the White House and Nippon Steel declined comment.

U.S. Steel directed Reuters to its Thursday statement that it hoped "Biden will do the right thing and adhere to the law by approving a transaction that so clearly enhances U.S. national and economic security."

Nippon paid a hefty premium to clinch the purchase of the No.2 U.S. steel producer in a December 2023 auction, but the deal faced opposition from the powerful United Steelworkers union (USW), as well as politicians.

Biden has previously said he wants U.S. Steel to stay domestically owned and run, while President-elect Donald Trump has vowed to block a foreign takeover of the storied American firm after he takes office on January 20.

RISKY BUSINESS

In a November letter, Japanese Prime Minister Shigeru Ishiba urged Biden to approve the merger so as to avoid marring recent efforts to strengthen ties between the two countries, Reuters has exclusively reported.

A spokesperson for Ishiba could not be reached for comment on Friday and Japan's trade ministry declined to comment, saying there had been no formal announcement of a decision.

Japan is a key U.S. ally in the Indo-Pacific, where China's economic and military rise has raised concerns in Washington, along with threats from North Korea.

It is also the top investor in the United States and Keidanren, its biggest business lobby, has previously aired concerns that the review was facing political pressure.

Blocking the deal may dissuade international investors from bidding for politically sensitive U.S. companies with a unionized workforce in the short term, said Alistair Ramsey, vice president of steel research at consultancy Rystad Energy.

"Big bids are a risky idea less than 12 months from a presidential election, but big steel producers with traditional operating furnaces, such as Nippon Steel, see the U.S. as an excellent place to produce steel in the long term, despite the market depression there," he added.

Nippon has vowed to fight in the courts any decision to halt the deal, but lawyers including Nick Wall, M&A partner at Allen & Overy, have said mounting any such legal challenge against the U.S. government would be tough.

The two companies had sought to assuage concerns over the merger. Nippon offered to move its U.S. headquarters to Pittsburgh, where the U.S. steelmaker is based, and promised to honor all agreements in place between U.S. Steel and USW.

This week, a source familiar with the matter said Nippon Steel had also proposed giving the U.S. government veto power over any potential cuts to U.S. Steel's production capacity, as part of its efforts to secure Biden's approval.

"It is difficult to fully understand the risks involved in Nippon Steel's potential acquisition of U.S. Steel," said a Japanese government official, who spoke on condition of anonymity, as did the other sources.

"Nippon Steel has done everything to eliminate risks related to economic securities, including committing not to reduce production."

Nippon Steel faces a $565-million penalty payment to U.S. Steel following the deal's collapse, set to prompt a major rethink of its overseas-focused growth strategy.

With the acquisition of U.S. Steel, Nippon Steel aimed to raise its global output capacity to 85 million metric tons a year from 65 million now, nearing its long-term goal of taking capacity to 100 million tons.

U.S. Steel has previously said the deal's failure would put at risk thousands of jobs and it might be forced to close some steel mills, an assertion the USW union called baseless threats and intimidation.

But Atilla Widnell, managing director at Singapore-based trade consultancy Navigate Commodities, said any decision to block the deal was "misguided".

"Nippon Steel is a bona fide operator of overseas assets with a strong and successful track record," said Widnell.

"Even more so, U.S. Steel has acknowledged its assets are in dire need of new large-scale investment and it will not be able to sustain its operational capacity and production in its current state."

(Additional reporting by Devika Nair, Kanishka Singh, Alexandra Alper, Yuka Obayashi, Satoshi Sugiyama, Yoshifumi Takemoto, Sakura Murakami, Nobuhiro Kubo and Amy Lv; Writing by Lincoln Feast and John Geddie; Editing by Neil Fullick and Clarence Fernandez)

((Kanishka.Singh@thomsonreuters.com; +12024508248;))