A $5 billion deal key to CoreWeave's AI empire just lost another investor's support
News Summary
CoreWeave's proposed $5 billion acquisition of data center firm Core Scientific is facing increasing investor opposition. The deal's uncertainty grew after Gullane Capital, the third-largest shareholder in Core Scientific, stated it would reject the offer. Trip Miller, founder of Gullane Capital, indicated he would vote no under current deal math, as it would value his Core Scientific shares at a discount to their current market price. This follows a detailed opposition statement from Two Seas Capital, which owns about 6.3% of Core Scientific's stock, arguing the deal significantly undervalues the company. CoreWeave CEO Michael Intrator insists the acquisition is "the most compelling path forward for Core Scientific stockholders" and is its "best and final" offer. He highlighted that CoreWeave is Core Scientific's largest customer, accounting for 76% of its revenue, and warned about the risks of remaining an independent company. Initially valued at approximately $9 billion, or $20.40 per share, in July, the deal's economics have shifted. Due to a dip in CoreWeave's shares and a rise in Core Scientific's, the current stock conversion deal values Core Scientific at around $17 per share, below its market price of approximately $19. CoreWeave's rapid, debt-fueled growth has seen its market capitalization soar to $70 billion, but its debt also climbed to $11.2 billion with borrowing costs ranging from 7% to 15%, while operating margins have shrunk from 20% to 2%, fueling debate about an AI bubble.
Background
CoreWeave is a rapidly growing AI cloud provider, quickly expanding its data center footprint and computing power through blockbuster deals with giants like OpenAI, Meta, Microsoft, and Nvidia, and by snapping up AI developers and cloud providers. The company plans to expand its operational data center capacity from approximately 470 megawatts to over 900 megawatts by the end of 2025. Core Scientific is a data center developer and operator that currently leases approximately 270 megawatts of data center space to CoreWeave. CoreWeave seeks to acquire Core Scientific to vertically integrate and control its largest cost—data centers—and save an estimated $10 billion in lease payments over the next 12 years. However, the economics of this acquisition have come under scrutiny due to CoreWeave's dipping stock price and Core Scientific's rising share value, leading to investor concerns about valuation and deal structure.
In-Depth AI Insights
What does the investor opposition truly reveal about the underlying value perception and broader dynamics of the AI infrastructure market? The investor opposition highlights a significant disconnect between the acquirer's strategic needs and the target company's shareholders' valuation expectations in a rapidly evolving AI market. - CoreWeave's stock price dip has eroded the initial premium offered in its stock conversion deal, making its current value less than Core Scientific's market price. This exposes the fragility of CoreWeave's valuation relative to its rapid growth and high debt. - Core Scientific shareholders believe the company is undervalued, citing its intrinsic worth and potential as a more lucrative acquisition target in a "hot data center market," potentially reaching $30-$40 per share independently. - This also points to broader market concerns about the "AI bubble" nature of CoreWeave, suggesting its high valuation might be unsustainable, especially with operating margins plummeting and borrowing costs soaring. Investors are scrutinizing the profitability and capital structures of rapidly expanding AI infrastructure companies more rigorously. Is CoreWeave's aggressive growth strategy sustainable given its high borrowing costs and squeezed profit margins? CoreWeave's growth strategy faces severe sustainability challenges, particularly against a backdrop of high borrowing costs and shrinking profit margins. - With $11.2 billion in debt and borrowing costs ranging from 7% to 15%, CoreWeave's expansion is heavily reliant on expensive external financing. This debt load becomes unsustainable if profit margins cannot significantly improve through economies of scale or more efficient operations. - A drastic drop in operating margins from 20% to 2% is a red flag, indicating that the costs of rapid expansion are quickly eroding revenue. This has led analysts to question the fundamental viability of its business model, with some even asking if the business "should even exist." - The proposed acquisition of Core Scientific, aimed at saving $10 billion in lease payments, signals CoreWeave's acknowledgment of its problematic cost structure. However, if the acquisition fails, or even if successful, fails to deliver effective integration and cost efficiencies, its profitability pressures will intensify, potentially leading to a market re-evaluation of its valuation. What are the long-term strategic implications for both CoreWeave and Core Scientific if this acquisition fails? The success or failure of this acquisition will have starkly different long-term strategic implications for both companies. - For CoreWeave: If the acquisition fails, CoreWeave will lose control over critical data center infrastructure and continue to incur hefty lease payments, representing a significant blow to its profitability and vertical integration strategy. It will be forced to seek alternative solutions for its "planetary scale" infrastructure needs, potentially facing higher CapEx and delays, further exacerbating its debt and margin pressures. This could force a reassessment of its aggressive expansion strategy and likely lead to a repricing of its long-term growth prospects by the market. - For Core Scientific: If the acquisition fails, Core Scientific will continue as an independent data center operator. Despite CoreWeave being its primary customer, the belief that it is undervalued, and the potential value of $30-$40 per share articulated by its CEO, suggests it could attract other, more favorable acquisition offers or realize higher value through independent growth in the hot data center market. However, it also faces the risk of losing its largest customer if CoreWeave shifts to other providers or builds its own facilities, which would severely impact its revenue.