WASHINGTON/TOKYO, Sept 10 (Reuters) - A month before

Nippon Steel ( NISTF ) discovered its $15 billion takeover of U.S. Steel

was on the brink of being torpedoed by President Joe Biden, the

Japanese company received a strong hint that things were taking

a turn for the worse.

On Aug. 1, officials from the powerful Committee on Foreign

Investment in the United States (CFIUS) told representatives of

Japan's biggest steelmaker and its U.S. target that the

committee had identified a potential national security risk, two

sources familiar with the negotiations told Reuters.

CFIUS was concerned that the deal could reduce U.S. steel

production capacity, disrupting critical industries like

transportation and infrastructure, the officials told the

executives in the call, which has not previously been reported.

The warning from the U.S. committee - which has the power to

block foreign acquisitions on national security grounds - should

have rung alarm bells at Nippon Steel ( NISTF ), which was already

fighting criticism from a labour union and U.S. politicians

ahead of Nov. 5 elections.

Yet, the Japanese steelmaker hoped it could still win

approval for the deal by patiently explaining its business

merits, according to Reuters' interviews with two sources with

knowledge of the discussions, one company source and a top

Nippon Steel ( NISTF ) executive.

In an Aug. 19 follow-up meeting to the Aug. 1 call held at

the Treasury Department according to one of the sources, the

companies' representatives stressed to CFIUS the economic

importance of Nippon Steel's ( NISTF ) investments given U.S. Steel's

struggling business. They left feeling their case had been

heard, the two sources close to the talks told Reuters.

And in an interview on Aug. 28 with Reuters, Nippon Steel's ( NISTF )

chief negotiator Takahiro Mori expressed confidence the deal was

on track. He said he wanted to build a constructive long-term

relationship with the unions and that he had met around 1,000

people, including many workers, during five U.S. visits since

the offer was announced in December to explain its economic

benefits.

"The political power of the union will weaken. That's true

now and of course after the election", he told Reuters, adding

that talks with CFIUS and other U.S. regulators were

"progressing". A day later, Nippon Steel ( NISTF ) publicly vowed to

invest $1.3 billion to refurbish U.S. Steel's aging facilities.

But on Aug. 31, CFIUS sent the two merging partners a

17-page letter detailing its concerns and giving them just one

business day to respond. Reuters and other media reported last

week that President Joe Biden was poised to kill the deal.

U.S. Steel, Nippon Steel ( NISTF ) and CFIUS did not comment on the

details of process as laid out by Reuters.

"We do not believe this transaction creates any national

security concerns," Nippon Steel ( NISTF ) said in a statement, without

elaborating on the negotiations.

U.S. Steel said in a separate statement that there was "no

scenario" in which it could make necessary investments without

the Japanese company: "A transaction with Nippon Steel ( NISTF ) is the

best avenue to ensure that U.S. Steel will be able to thrive

well into the future."

POLITICAL HOT POTATO

Nippon Steel ( NISTF ) had tried to approach the

politically-connected United Steelworkers union (USW) before it

announced it had agreed to purchase U.S. Steel, a company based

in the pivotal swing state of Pennsylvania during an election

year.

On Nov. 20, the Japanese steelmaker requested a meeting with

USW, according to U.S. Steel filings in January. But lawyers for

the American firm denied the request, saying the union had

aligned with another suitor and talks would risk breaking the

confidentiality of a competitive bidding process, the filings

said.

The approach backfired.

When Nippon Steel's ( NISTF ) deal was made public on Dec. 18, USW

head David McCall slammed the companies for keeping unions in

the dark. In a statement the same day, the union leader accused

U.S. Steel of ignoring workers' concerns while "selling out" to

a foreign company.

He urged the U.S. government to scrutinise the deal to see

if it served workers and national security interests.

Just three days after McCall's appeal, Biden's national

economic advisor Lael Brainard said the takeover appeared to

deserve "serious scrutiny".

USW declined to comment on the merger process.

"In hindsight it was obvious (Nippon Steel ( NISTF )) needed to get

the union on board but I don't think they expected the union,

and in particular the leader of the union, to get as upset as he

did," said Nick Wall, an M&A partner at Allen & Overy, who was

not involved in the negotiations.

In the weeks after the deal announcement, both Biden and his

Republican rival Donald Trump voiced opposition to the merger.

When Japanese Prime Minister Fumio Kishida headed to

Washington DC in April - the first state visit by a Japanese

leader in nine years - Nippon Steel's ( NISTF ) acquisition was the

elephant in the room.

McCall and his wife joined VIP guests such as Amazon founder

Jeff Bezos and actor Robert De Niro at a lavish dinner Biden

arranged for Kishida, listening to live music by singer Paul

Simon. U.S. Steel and Nippon Steel ( NISTF ) top executives were not on

the list of more than 200 guests released by the White House.

'LISTEN ONLY MODE'

As the political noise around the deal grew louder, Nippon

Steel ( NISTF ) still believed there was a path forward and that the union

was simply trying to extract better terms, two sources close to

the company told Reuters, requesting anonymity due to the

sensitivity of the discussions.

In May, chief negotiator Mori told Reuters he believed that,

once the election was over, the president would assess the

economic merits of the deal. Blocking it could upset one of

America's closest allies and it seemed unlikely any

administration would want to do that, he added.

But that logic went out of the window on August 31, when the

CFIUS letter landed.

The letter argued the transaction posed a risk without

offering any discussion of ways to assuage officials' concerns

and gave the parties until Sept. 4 to respond, according to the

two sources familiar with the discussions.

In a call on Sept. 1, attorneys working on the deal pressed

CFIUS officials about why they had been given so little time,

the sources said.

"We have been instructed to be in listen only mode," a CFIUS

official replied, an ominous sign as sources inside the Biden

administration were telling the two companies the White House

was about to block the takeover, the people said.

The companies began frantically drafting a response,

correcting what they perceived as factual inaccuracies,

proposing mitigation and arguing to save the deal in a 100-page

letter delivered on Sept. 3.

The letter, reviewed by Reuters, said they expected USW to

be more "forward-leaning" in talks with the companies.

The next day, however, news broke that the White House was

close to announcing Biden was preparing to block the deal.

"In the future, this deal will probably be considered as a

textbook case of how a business failed to understand politics,"

said David Boling, a former U.S. trade official now at Eurasia

Group.