A large shareholder in Core Scientific, a data center developer and operator, said he would reject a proposed purchase of the company by the rival data center firm CoreWeave in an upcoming shareholder vote.
“Under the math of the deal today, I would have to vote no,” Trip Miller, the founder of the investment firm Gullane Capital, told Business Insider on Friday afternoon.
Gullane, based in Memphis, Tennessee, is the third-largest shareholder in Core Scientific, behind Vanguard and BlackRock, and owns a stake in the company worth about $200 million.
Miller’s opposition adds to other recent pushback against the deal, casting doubt on one of the year’s largest data center mergers. CoreWeave — the AI cloud darling racing to scale its computing power — needs the roughly $5 billion takeover to help it continue to grow rapidly and also cut billions of dollars in soaring costs.
But a dip in its stock price has weakened the offer’s value, exacerbating investor concerns that the deal sharply undervalues Core Scientific just weeks before shareholders are set to vote on the transaction.
On October 14, Two Seas Capital, another investment firm that owns about 6.3% of Core Scientific’s stock, published a lengthy presentation that outlined its myriad objections to the takeover, including that it was not profitable enough for stock owners. The firm urged investors to reject it in the upcoming shareholder vote on October 30.
In response, the CEO of the Livingston, New Jersey-based CoreWeave said the acquisition was “the most compelling path forward for Core Scientific stockholders” and that the present deal would be its “best and final” offer for the company.
“The combination will offer Core Scientific and CoreWeave stockholders the opportunity to benefit from the tremendous upside potential and long-term value creation driven by greater verticalization,” Michael Intrator, CoreWeave’s CEO, wrote in a letter published on October 16.
Intrator said the complaints from Two Seas Capital were “misleading and misinformed.”
CoreWeave’s rapid, debt-fueled growth has thrust it into the center of a growing debate over whether AI speculation has become a bubble or if early movers like it are seizing on a historic investment opportunity.
In July, CoreWeave announced that it had reached an agreement to buy Core Scientific in a stock conversion deal that valued Core Scientific at roughly $9 billion at the time and $20.40 per share — a 66% per share premium over what Core Scientific stock had then been recently trading for.
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But in the ensuing months, the economics have shifted as CoreWeave’s shares have dipped and Core Scientific’s have risen. The stock conversion deal currently values Core Scientific’s shares at around $17, more than 10% below its market price of about $19 on Friday.
CoreWeave and Core Scientific did not respond to requests to comment.
“This is not a popular deal, I think for one simple reason: it’s a flawed structure,” Miller said.
“It would be a deal that would value my shares, actually, at a discount to what they currently trade for today.”
Fast growth and mounting costs
Since a shaky initial public offering in March, CoreWeave has raced to a $70 billion market capitalization — more than three times its value after the IPO — and a place at the forefront of the booming data center business.
It has announced blockbuster deals with some of the biggest names in artificial intelligence, including OpenAI, Meta, Microsoft, and the chipmaker Nvidia, and has spent billions of dollars snapping up AI developers and cloud providers to broaden its capabilities and customer offerings.
In the company’s second-quarter earnings call, Intrator said that its biggest customers required the development of infrastructure, including data centers, on a “planetary” scale.
“We are aggressively expanding our footprint on the back of intensifying demand signals from our customers, ensuring that we maintain a durable, multi-year runway for growth,” Michael Intrator, CoreWeave’s CEO and cofounder, said in the company’s second quarter earnings call.
CoreWeave said it is expanding its roughly 470 megawatts of operating data centers to more than 900 megawatts by the end of 2025 — enough power to light up about a fifth of New York City on an average day. The Core Scientific acquisition would more than double that by operational megawattage and expand the company’s pipeline of contracted future power by 50% to more than 3 gigawatts.
Revenue for CoreWeave in the second quarter was $1.2 billion, more than double the same period a year prior, the company reported, and its revenue backlog of $30.1 billion had doubled since the beginning of the year — demonstrating its tremendous business prospects. Its operating margins, however, fell from 20% to 2% year over year, a sign of how costs are increasingly eating into the company’s profitability.
The company reported its debt had grown to $11.2 billion at the end of the second quarter, a 40% increase from the beginning of the year, and that its borrowing costs ranged from 7% to 15% on its various loans.
Gil Luria, an analyst who covers the company, has raised concerns about the high-cost borrowing compared to the company’s slimmer profit margins.
“They’re selling $20 bills for 15 bucks,” Luria said.
“Sometimes we forget to ask ourselves if this business should even exist,” Luria said. “I’m not sure the answer is yes.”
Acquiring Core Scientific would streamline some of CoreWeave’s mounting overhead.
CoreWeave rents roughly 270 megawatts of data center space from Core Scientific, and owning the company would allow CoreWeave to save about $10 billion in lease payments for that space over the next 12 years, it has said.
“They realize how important this is to the long-term viability of their business model, owning the economics around their largest cost, which is data centers,” said Raul Martynek, the CEO of the data center developer and operator DataBank, which is not involved in the deal.
Martynek said that Intrator’s response letter signified the CEO was making a “full-throated defense of their offer” to purchase Core Scientific.
In a hot data center market, is Core Scientific worth more?
Among the concerns outlined in its presentation, Two Seas said that the deal didn’t offer shareholders protection from stock fluctuations that have upended the economics of the transaction.
“The initial headline deal price of $20.40 per share undervalued Core Scientific’s intrinsic value and strategic value to CoreWeave,” Two Seas Capital wrote. “Following one of the worst post-deal drawdowns in an acquirer’s stock price since 2020; the current deal value of less than $18 per share reflects a take-under of Core Scientific.”
In his letter on Thursday, Intrator wrote that CoreWeave represents Core Scientific’s only meaningful data center customer and that its business accounts for 76% of Core Scientific’s revenue.
Intrator added that Core Scientific investors should “think objectively about Core Scientific’s stand-alone prospects and the significant risks involved” in rejecting the deal and remaining an independent company.”
Miller disagreed, stating that in a hot data center market, “the belief is, if you leave this company alone for 18 months, it’s a $30 to $40 company” per share, and that he felt it could be a more lucrative acquisition target.
