By Katya Golubkova and Makiko Yamazaki
TOKYO (Reuters) -Governments should not intervene in deals in an arbitrary manner as a matter of principle, Taro Kono, a Japanese minister and prime ministerial candidate, said when asked about news that the U.S. is preparing to block Nippon Steel's takeover of U.S. Steel.
Sources told Reuters on Wednesday that the White House was close to announcing that U.S. President Joe Biden will block the Japanese company's $15 billion bid for U.S. Steel on national security risks.
The deal is facing growing bipartisan political opposition amid upcoming presidential elections in the U.S., and a powerful labour union is against the takeover of Pennsylvania-headquartered U.S. Steel, a swing state key to both Democrats and Republicans.
"There are times when the free market is outweighed by national security, environment and labour rights issues, but I am not sure if the acquisition of U.S. Steel is comparable to that," Kono, Japan's digital minister who is running in the ruling Liberal Democratic Party (LDP) leadership election this month to replace Prime Minister Fumio Kishida, said on Thursday.
Buyouts can benefit companies and regions, he said. The LDP's parliamentary control means its leader becomes the prime minister of Japan.
"Perhaps it is the presidential election and everyone wants the labour union vote, but I would hope that the market will not be distorted by such a situation."
The deal, which both companies hope to close by the end of this year, is particularly sensitive as the U.S. is Japan's closest ally and Japan, in turn, is the biggest foreign investor into the U.S.
"The U.S.-Japan relationship is deeper, richer, and stronger than any single commercial transaction," the U.S. Ambassador to Japan, Rahm Emanuel, told reporters separately on Thursday.
MARKET REACTION
Nippon Steel shares closed down 0.4% in Tokyo after climbing on the news earlier in the day, still outperforming the wider Nikkei index which was down 1%. U.S. Steel shares closed down 17.5% on Wednesday.
In a letter, which has not been previously reported, the Committee on Foreign Investment in the United States (CFIUS) warned the Japanese company on Saturday the deal would damage American steel production and decrease the likelihood that U.S. Steel would continue to aggressively seek trade remedies, people familiar with the matter told Reuters separately.
The Japan-U.S. Business Council, a Washington, D.C.-based industry group representing major Japanese firms, said in a statement on Thursday it was seriously concerned by the reports Biden was blocking the sale.
"We are very alarmed by any attempts to politicise the CFIUS review process...which should be conducted objectively based on fair rules and processes," the group said.
Japan's three megabanks - Sumitomo Mitsui (NYSE:SMFG) Financial Group, Mitsubishi UFJ (NYSE:MUFG) Financial Group and Mizuho Financial Group - planned to lend Nippon Steel a combined $16 billion for the deal.
"While the acquisition of U.S. Steel could be positive in the long term, there is a risk of equity finance if Nippon Steel is to buy the company, which dilutes their stocks and is a negative cue in the short term. Those concerns have been eased after the news," said Seiichi Suzuki, chief equity market analyst at Tokai Tokyo Intelligence Laboratory.
Nippon Steel is keen on the U.S. Steel deal as its home market is facing cheap imports from China, the world's biggest steel producer.
With the takeover, Nippon Steel hoped to bring its global crude steel capacity to 86 million metric tons per year, close to its goal of 100 million, and to add 30 billion-40 billion yen ($209 million-$278 million) to its profit in the January-March quarter of 2025.
To win support from the influential United Steelworkers (USW) union, Nippon Steel has pledged to move its U.S. headquarters to Pittsburgh, where U.S. Steel is based.
It has also offered commitments on jobs and said it will invest over $2.7 billion in union-represented facilities and ensure that the core senior management as well as a majority of board members at the U.S. company would be U.S. citizens.
"It remains a very complicated situation given the job losses that may arise from plant closures, etc, if the deal doesn't go ahead so my thinking is this is something that could be back on the table once the U.S. (elections) pass in November," said Andrew Jackson, head of Japanese equity strategy at Ortus Advisors in Singapore.
Spokespeople for Nippon Steel and U.S. Steel declined to comment on the CFIUS letter but referred Reuters to prior statements arguing that the deal does not create any national security concerns and would strengthen the U.S. steel industry.
"We fully expect to pursue all possible options under the law to ensure this transaction, which is the best future for Pennsylvania, American steelmaking, and all of our stakeholders, closes," the spokesperson for U.S. Steel added.
Nippon Steel Vice Chairman Takahiro Mori, a key negotiator on the deal, plans to visit the U.S. this month to continue deal-related meetings but the company declined to specify dates or disclose the names of those Mori is set to meet.
($1 = 143.6500 yen)