Two more federal equity deals with private companies were announced in September. That brought the total figure in Cato’s tracker to 34 companies, almost triple the number at the start of the year. (See the full list of companies at the bottom.)
Elmet Group, which went public earlier this year, is a Portland, Maine-based producer of tungsten and molybdenum materials used in a range of defense products, including missiles and submarines. On September 14, the Department of Defense (DOD) committed $450 million to the company, with $200 million paid at closing. A separate Defense Logistics Agency supply contract sets a $150 million minimum for purchases of tungsten materials for the National Defense Stockpile, with a $2 billion ceiling.
The Pentagon says the deal was made through the Industrial Base Analysis and Sustainment (IBAS) program, working with the Economic Defense Unit (EDU). It’s important to note that the statute underpinning IBAS authorizes support for defense production and supply chains but does not expressly authorize the Pentagon to acquire equity stakes in private companies.
In return, the Pentagon received preferred shares that Elmet can later buy back and warrants to purchase up to 19.9 percent of Elmet’s common stock, with combined voting power initially limited to 19.9 percent. The terms also grant it the right to appoint an independent director and install a nonvoting board observer. It also gives the DOD consent rights over major business decisions, including certain financing transactions, dividends, and changes in corporate control. The Pentagon can reserve all the funded projects’ production capacity for national defense needs, with no formal emergency declaration required.
The extensive control rights sound similar to the golden share that the administration extracted when it approved Nippon Steel’s purchase of US Steel. Last year, US Steel announced it planned to halt production at its Granite City plant but said it would continue to pay workers to do nothing (lest it incur the wrath of its government owner). It didn’t matter. The administration proceeded to force the company to continue processing steel there as well. But while the US Steel golden share doesn’t have a monetary value, the Elmet deal involves hundreds of millions of taxpayer dollars and makes the government a major customer. That seems more like quasi-nationalization than the administration’s usual minority stake in a company.
Why such different and more drastic terms? Nobody outside the deal participants would know, since the administration’s intentionally opaque approach to these deals generates more questions than answers. Well over a year and 34 equity acquisitions later, the administration still hasn’t even bothered to release a formal opinion laying out its legal case for the deals.
The other apparent deal is with Hertha Metals, a Conroe, Texas-based developer of high-purity iron used for rare-earth magnets. It received $65 million, also through IBAS in partnership with the EDU. That’s roughly half of the $134 million Series A fundraising round, co-led by private investors Khosla Ventures and Doerr Capital. The company says the money will help build a plant capable of producing 10,000 metric tons of high-purity iron annually.
The deal is “apparent” because only the company announced it. The Wall Street Journal inquired, but “a Pentagon official said the department doesn’t comment on speculation about potential transactions.” If Hertha itself announced the deal and says it was orchestrated by the same Pentagon entities involved in the other September deal, we’re not so sure it’s just speculation.
If it’s not, then private capital was already backing Hertha’s technology, raising the question of why taxpayers needed to become shareholders. If the answer is that the federal stake “crowded in” the private investment, the government already possesses clear statutory authority to provide other forms of material assistance. Again, there’s no express statutory authority for IBAS to acquire equity from a private company.
Two deals, but only one is official, both involving the same Pentagon entities and in neighboring corners of the minerals sector. The public only knows the terms of control for the Elmet deal because the company is publicly traded and had to file the agreements with the Securities and Exchange Commission (SEC). Whether Hertha’s deal carries similar control rights is anyone’s guess. The overall muddiness is just the latest example of the administration’s ad hoc, governance-by-deal approach to policymaking.
