CoreWeave's $9 Billion Core Scientific Takeover: A Convertible Bond Arbitrage Play?

The acquisition of Core Scientific by CoreWeave marks a seismic shift in the high-performance computing (HPC) and cryptocurrency mining sectors. But beneath the headline deal lies a complex financial structure that could create compelling opportunities for investors willing to parse the details of Core Scientific's convertible bonds. Let's dissect the terms, risks, and potential arbitrage angles in this all-stock transaction.

The Deal's Structure: Equity Over Debt

CoreWeave acquired Core Scientific in an all-stock deal valued at $9 billion, with Core Scientific shareholders receiving 0.1235 shares of CoreWeave Class A common stock per share of their holdings. Post-acquisition, Core Scientific's shareholders own less than 10% of the combined entity—a stark dilution that underscores CoreWeave's confidence in its post-merger valuation.

The move avoids adding to CoreWeave's leverage, as the deal doesn't incur new debt. Instead, CoreWeave assumes Core Scientific's $1.17 billion in long-term debt while eliminating over $10 billion in future lease obligations (a major cost-saving win). This vertical integration of debt and assets positions the combined firm to capitalize on synergies, including projected $500 million in annual savings by 2027.

Core Scientific's Convertible Bonds: A Pre-Deal Liability, Post-Deal Opportunity?

Before the acquisition, Core Scientific had two key convertible bonds:

1. $550 Million 0% Convertible Zero-Coupon Notes Due 2031
2. Conversion Price: $22.49/share (set at a 42.5% premium to Core Scientific's stock price at issuance in late 2024).
3. Conversion Rate: 44.4587 shares per $1,000 principal.

4. Key Features:

   • Callable by CoreWeave starting June 2028 if CoreWeave's stock price exceeds 130% of the conversion price for 20 consecutive days.
   • Redeemable at bondholders' option on December 15, 2027, or in case of a “fundamental change” (e.g., a merger).

5. $260 Million 10% Convertible Notes Due 2029

6. Status: Early redeemed, no longer trading.

Valuation Dynamics: Post-Acquisition Impact on Bonds

The acquisition fundamentally alters the calculus for holders of the 2031 notes. Here's why:
- Underlying Stock Conversion: The notes were originally tied to Core Scientific's stock. Post-acquisition, bondholders can convert their notes into CoreWeave shares via the exchange ratio (0.1235).
- Conversion Value Calculation:
Let's assume CoreWeave's stock price today is $X (query below). The effective conversion price for bondholders would be:
[ \text{Core Scientific Conversion Price} \times \text{Exchange Ratio} = \$22.49 \times 0.1235 = \$2.78/\text{CoreWeave share}. ]
If CoreWeave's stock is above $2.78, the bonds are in-the-money, creating upside for holders.

Arbitrage Opportunities: Where the Rubber Meets the Road

1. Basis Risk Arbitrage

If the 2031 notes are trading below their conversion value (due to illiquidity or market pessimism about CoreWeave's stock), investors could:
- Buy the bonds and short CoreWeave shares, locking in profit as the two converge.

2. Call Risk and Early Redemption

CoreWeave has an incentive to call the bonds if its stock price exceeds the 130% threshold (now effectively $3.63/CoreWeave share due to the exchange ratio). If this happens, bondholders receive cash or shares at a below-market rate, creating a short window for profit capture.

3. Event-Driven Plays

The December 2027 redemption option adds another catalyst. If CoreWeave's stock rallies ahead of this date, bondholders may demand redemption, forcing CoreWeave to buy back bonds at par—a scenario that could tighten spreads between bond prices and equity performance.

Risks and Considerations

• Volatility in CoreWeave's Stock: The deal hinges on CoreWeave's ability to execute on synergies. A drop in its stock could erase conversion value.
• Bond Liquidity: The 2031 notes are non-traded (per data), making them hard to exit quickly.
• Regulatory and Operational Risks: Core Scientific's legacy issues (e.g., negative equity, operational inefficiencies) could resurface, pressuring CoreWeave's stock.

Investment Thesis

For aggressive investors, the 2031 convertible notes offer a high-reward, high-risk bet:
- Buy the bonds if CoreWeave's stock trades above $2.78/share and the bonds trade at a discount to their conversion value.
- Monitor the 130% call threshold: A breach could trigger a forced buyback, creating a tailwind for bond prices.

For conservative investors, focus on CoreWeave's equity. The acquisition's 66% premium to Core Scientific's pre-deal stock suggests confidence in long-term value creation.

Final Take

CoreWeave's acquisition of Core Scientific is a masterstroke of vertical integration, but the real fireworks may lie in the convertible bond arbitrage space. With careful analysis of conversion mechanics and catalyst timelines, investors can turn this corporate action into a profitable leveraged bet—or a cautionary tale.

As always, proceed with caution and consult a financial advisor before entering high-risk trades.