After AI hyperscaler CoreWeave (CRVW) revealed its pending $9 billion acquisition of data infrastructure provider Core Scientific (CORZ), one significant roadblock emerged to completing the deal.
Alternative investment firm Two Sails Capital, which is Core Scientific’s largest active shareholder, announced its intention to vote against the merger.
Although Two Sails is also an investor in CoreWeave and indicated that it is “not philosophically opposed to a merger of these two parties,” the firm does not like the structure of the deal that’s been proposed.
Its opposition stems from the all-stock nature of the transaction, which was being done at an “inadequate valuation,” according to an open letter released by Two Sails founder and CIO Sina Toussi.
“The proposed all-stock, uncollared structure leaves Core Scientific shareholders exposed to the high volatility of CoreWeave's share price with no protections on the value they will receive at or following close,” Toussi said.
Two Sails noted last week that CoreWeave’s share price had dropped 30% since the deal was announced on July 7, which reinforced its assessment that “the transaction decidedly and unfairly favors CoreWeave at the expense of Core Scientific shareholders.”
And the concerns that Two Sails expressed in its open letter last week have come to the forefront again this week after a mixed second-quarter earnings report on Tuesday sent CoreWeave’s stock plunging 20.8% on Wednesday.
Meanwhile, Core Scientific’s stock dropped 8.3%.
Losses rattle Wall Street
While the company reported better-than expected revenue for the quarter — bringing in $1.21 billion, compared to analyst expectations of $1.08 billion — its losses were much bigger than expected.
CoreWeave reported adjusted earnings per share loss of 60 cents for Q2, compared to a consensus estimate of 23 cents per share, according to FactSet.
In a recent interview with Barron's, CEO Michael Intrator said that demand has outstripped supply, and this means it has to continue investing heavily in its business, which will only compound the losses.
CoreWeave’s guidance calls for $20 billion to $23 billion in capital expenditures for the year, with a “significant portion” of that money expected to be spent in the fourth quarter.
D.A. Davidson analyst Gil Luria is estimating that CoreWeave will need to add about $10 billion in additional debt to support its data center-expansion strategy, as Barron’s notes.
Luria said in a client note that the company’s earnings “were underlined by deteriorating profitability and increased borrowing cost. This continues to be a business that is, in our view, not worth scaling.”
These further losses could keep putting pressure on CoreWeave to restructure the terms of its deal for Core Scientific, which is what Two Sails is demanding in order to approve the merger.
Wall Street always likes to see solid quarterly revenue numbers like CoreWeave just delivered, but it’s the profitability guidance that will increase its valuation at the end of the day.
As long as profits remain out of reach, CoreWeave’s stock could continue to suffer, making the current terms of the merger a much worse deal for Core Scientific’s shareholders.
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