A significant shareholder in Core Scientific, a prominent data center developer and operator, has announced his intention to vote against the proposed acquisition by rival firm CoreWeave in an upcoming shareholder meeting. Trip Miller, founder of the investment firm Gullane Capital, expressed his reservations during an interview with Business Insider on Friday. Miller, whose firm is the third-largest shareholder in Core Scientific with a stake valued at approximately $200 million, stated, "Under the math of the deal today, I would have to vote no."
Miller's dissent adds to a wave of skepticism surrounding this significant merger in the data center industry. The proposed acquisition, valued at nearly $5 billion, is critical for CoreWeave, which is striving to rapidly expand its computing capabilities and manage soaring operational costs. However, recent fluctuations in CoreWeave's stock price have raised alarms among investors, leading many to believe the deal undervalues Core Scientific just weeks before the crucial vote scheduled for October 30.
On October 14, Two Seas Capital, another investment firm holding approximately 6.3% of Core Scientific's stock, released a detailed presentation outlining its objections to the acquisition. The firm criticized the deal for being insufficiently profitable for stockholders and urged fellow investors to reject it in the upcoming vote.
Responding to the backlash, Michael Intrator, CEO of CoreWeave, asserted that the acquisition represents the best pathway forward for Core Scientific shareholders. In a letter dated October 16, he emphasized that the merger would unlock significant potential for both companies, enhancing long-term value through increased vertical integration. He dismissed the criticisms from Two Seas Capital as "misleading and misinformed."
CoreWeave's rapid expansion has ignited discussions about the sustainability of its growth model amidst rising costs and market speculation surrounding AI investments. Since its initial public offering in March, CoreWeave's market capitalization has skyrocketed to $70 billion, benefiting from lucrative partnerships with industry giants like OpenAI, Meta, Microsoft, and Nvidia. Intrator highlighted the urgent need for data center infrastructure to support these major clients, stating, "We are aggressively expanding our footprint on the back of intensifying demand signals from our customers."
CoreWeave currently operates approximately 470 megawatts of data center capacity, with plans to increase this to over 900 megawatts by the end of 2025. The acquisition of Core Scientific would significantly enhance this capacity, more than doubling the operational megawatts and increasing the company's future power pipeline by 50% to over 3 gigawatts. Despite these promising figures, CoreWeave has faced challenges, as its operating margins plummeted from 20% to just 2% year-over-year, indicating that rising costs are increasingly impacting profitability.
As of the second quarter, CoreWeave reported a revenue of $1.2 billion, a remarkable increase from the previous year, with a revenue backlog of $30.1 billion. However, the company's debt has also surged to $11.2 billion, a 40% increase from earlier in the year, with borrowing costs ranging from 7% to 15%. Analyst Gil Luria expressed concerns regarding the high-cost borrowing relative to CoreWeave's shrinking profit margins, questioning the long-term viability of the business model.
Acquiring Core Scientific could alleviate some of CoreWeave's growing overhead costs. Currently, CoreWeave leases approximately 270 megawatts of data center space from Core Scientific, and owning the company could save CoreWeave around $10 billion in lease payments over the next 12 years. Raul Martynek, CEO of DataBank, noted the strategic importance of the acquisition, stating that it would allow CoreWeave to control its largest operational cost: data centers.
However, Two Seas Capital has raised concerns about the deal's structure, asserting that it fails to protect shareholders against stock price fluctuations. They argue that the initial offer price undervalues Core Scientific and suggest that the current valuation reflects a "take-under" scenario for the company. Intrator defended the acquisition, emphasizing CoreWeave's pivotal role as Core Scientific's primary customer, accounting for 76% of its revenue. He cautioned shareholders to consider the significant risks associated with rejecting the deal and remaining an independent company.
While Intrator advocates for the acquisition, Miller posits that Core Scientific could thrive independently in the current data center market. He believes that if left to operate on its own for 18 months, Core Scientific could become a more attractive acquisition target with a share price ranging between $30 and $40. This ongoing debate highlights the complex dynamics of the data center industry and the critical decisions facing shareholders in the months ahead.
