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CoreWeave Buys Core Scientific: A Good Arbitrage Opportunity?

$CoreWeave, Inc.(CRWV)$   all-stock acquisition $Core Scientific, Inc.(CORZ)$   met negative market reaction. Post-announcement on July 7th, CRWV fell 2%, while CORZ dropped 15%, trading below its equivalent value in CRWV shares.

The market's negative reaction likely stems from disappointment over the absence of a cash deal and increased volatility due to the all-stock nature of the transaction.

Transaction Details​

According to the Core Weave announcement, the acquisition details include:

1. The deal is expected to close in Q4 2025, pending regulatory and stockholder approvals.

2. Core Scientific stockholders will receive 0.1235 CoreWeave shares for each Core Scientific share.

3. The deal values Core Scientific at approximately $9 billion (fully diluted basis and based on CoreWeave’s 5-day VWAP).

4. This represents a $20.40 per share value and a 66% premium to Core Scientific's unaffected price of $12.30 on June 25.

5. The final value will be determined at closing.

6. Core Scientific stockholders are expected to own less than 10% of the combined company.

Potential Arbitrage Profit?

First, it's crucial to emphasize that the 0.1235 exchange ratio is a contractual term approved by both companies' boards. The $9 billion acquisition value includes CORZ's convertible securities and potential shares from equity incentives. Using $9 billion to calculate arbitrage potential is incorrect.

Based on CRWV's closing price of $159.7 yesterday, 0.1235 shares equate to $19.72. Compared to CORZ's closing price of $14.83, the current arbitrage opportunity is approximately 33%.

However, uncertainty lies in whether CRWV's stock price will maintain its current level until the Q4 transaction completion. Some investors believe CRWV's 300% YTD gain is significantly overvalued, and potential share unlocking in late September could impact the price.

In this all-stock acquisition, solely buying the target company still carries risk due to potential fluctuations in the acquirer's stock price.

A more prudent arbitrage strategy would be a pair trade: buying CORZ while simultaneously shorting CRWV at a 1:0.1235 ratio (1000:124 shares). This strategy is based on CORZ's current price implying a CRWV value of only $120 per share (14.83/0.1235).

Of course, this arbitrage strategy also carries risks. If the merger doesn't complete as scheduled, the expected price convergence between the two stocks may not occur.

Other Information

• Generally beneficial for CoreWeave

CoreWeave estimates that this acquisition will immediately eliminate potential cumulative rent of up to $10 billion. Additionally, by 2027, integrating operations into Core Scientific's facilities is expected to save $500 million annually in operating costs.

In theory, this merger is a smart way for CoreWeave to scale up its business without issuing more debt or burning through precious cash. However, the new share issuance will result in approximately 7.7% dilution of equity at minimum.

"The deal expands CoreWeave's footprint, seeing its own ~1.3 GW of gross power across Core Scientific's US data center network, consisting of ~840 existing gross MW for Core Scientific's HPC contracts and ~500 gross MW crypto mining-allocated power capacity, plus an additional 1+ GW of potential gross power available for expansion," said Macquarie analysts Paul Golding and Marni Lysaght, in a Monday investor note.

However, Macquarie retained its Neutral rating and $65 price target on CoreWeave following the acquisition news.

~ Consider Mining Companies Capable of Transformation

Bitcoin mining sites typically possess substantial power infrastructure that can be repurposed to support data center operations, particularly in energy-intensive fields like AI and big data processing.

As AI technology advances, the demand for electricity is skyrocketing. The energy infrastructure originally used for Bitcoin mining can be transformed into valuable assets supporting AI data centers. This conversion not only enhances the economic viability of these sites but also reduces the time and costs associated with building new data centers from scratch.

Previously, Morgan Stanley pointed out that many Bitcoin miners were undervalued compared to their power generation capacity. This suggests that the market has not yet fully recognized the potential of these sites to be converted into data centers.

It's important to note that the Galaxy Digital report also points out that only some miners can benefit from AI - several key factors must be met. These include large land areas, access to cooling water, dark fiber connectivity, reliable power supply, and a skilled workforce.

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