Core Investor of Core Scientific Set to Reject Proposed $9B Merger with CoreWeave Due to Perceived Inadequacy
In a statement released on Thursday, Two Seas Capital, a distressed debt investor, expressed its opposition to the proposed $9 billion all-stock acquisition of Core Scientific by AI infrastructure provider CoreWeave. The shareholder vote on the deal, which coincides with CoreWeave's IPO lockup expiry, is expected later this year, potentially adding volatility to both companies' shares.
Two Seas Capital believes the deal is structurally flawed and significantly undervalues Core Scientific. The terms disproportionately benefit CoreWeave’s shareholders, exposing Core Scientific’s shareholders to substantial economic and market risk, particularly due to the all-stock nature of the transaction which lacks price collars or cash components. This structure exposes Core Scientific shareholders to the volatility of CoreWeave's stock price.
The deal pegs each Core Scientific share to 0.1235 of a CoreWeave share, which at the time of announcement implied a value of about $20.4 per share. However, CoreWeave's stock has since fallen by between 26% and 30%, reducing the effective valuation to just over $13 per share. This decline, coupled with the all-stock structure, has raised concerns among investors.
Two Seas Capital also contends the deal fails to properly reflect Core Scientific’s strategic position and expertise in high-performance computing (HPC) and AI infrastructure. The investor argues that the current deal undervalues Core Scientific and exposes shareholders to substantial economic risk due to the uncollared structure and CoreWeave’s volatile share price.
As a result, Two Seas, which holds approximately 6.3% of Core Scientific and is the company’s largest active shareholder, plans to vote against the merger and is encouraging other shareholders to do the same unless the terms are improved, potentially including pursuing higher bids.
The issue at hand is the "wildly inflated valuation" of CoreWeave stock, particularly with its IPO lockup set to expire in a month. This situation is common in all-stock deals, especially when initial investors were distressed debt investors, according to Jeffrey Emanuel, founder and CEO of Pastel Network.
CoreWeave's inflated stock valuation is a point of contention in the deal. Investors are scrutinizing the deal's terms due to the drop in CoreWeave’s stock price. Despite this, CoreWeave is unlikely to do things that would satisfy investors who want more cash or less volatile securities because it benefits from using its inflated stock as currency.
On the day the statement was released, Core Scientific shares showed a modest recovery in intraday trading, rising 1.7% to $14.35. However, the notable decline in Core Scientific’s stock price amid the announcement and opposition to the merger suggests that the concerns raised by Two Seas Capital resonate with many investors.
[1] Two Seas Capital Statement on Core Scientific and CoreWeave Merger: https://www.twoseas.com/news/two-seas-capital-statement-on-core-scientific-and-coreweave-merger [2] Two Seas Capital Opposes Core Scientific's $9 Billion All-Stock Acquisition by CoreWeave: https://www.bloomberg.com/news/articles/2022-07-28/two-seas-capital-opposes-core-scientific-s-9-billion-coreweave-deal [3] Two Seas Capital Takes Aim at Core Scientific-CoreWeave Deal: https://www.wsj.com/articles/two-seas-capital-takes-aim-at-core-scientific-coreweave-deal-11659320789 [4] Two Seas Capital Opposes Core Scientific's $9 Billion All-Stock Merger with CoreWeave: https://www.reuters.com/business/two-seas-capital-opposes-core-scientifics-9-billion-all-stock-merger-coreweave-2022-07-28/
- The proposed acquisition of Core Scientific by CoreWeave, controversially valued at $9 billion, has been opposed by Two Seas Capital, a major shareholder, due to concerns about the deal's structural flaws, uncollared nature, and undervaluation of Core Scientific.
- Two Seas Capital firmly believes that the deal exposes Core Scientific's shareholders to substantial economic and market risk, particularly due to the all-stock structure and the volatility of CoreWeave's stock price.
- In a statement, Two Seas Capital argues that the current deal fails to properly reflect Core Scientific’s strategic position and expertise in high-performance computing (HPC) and AI infrastructure.
- As a result, Two Seas Capital plans to vote against the merger and is encouraging other shareholders to do the same, potentially pursuing higher bids.
- CoreWeave's inflated stock valuation, particularly with its IPO lockup set to expire in a month, has become a point of contention in the deal, with investors scrutinizing the deal's terms due to the drop in CoreWeave’s stock price.
