BREAKINGVIEWS-Northern Data M&A punt typifies rent-a-chip woes

By Jennifer Johnson

LONDON, Aug 18 (Reuters Breakingviews) - Things move quickly in the world of artificial intelligence, though not always in the right direction. Just ask Northern Data NB2.DE, which rents powerful graphics processing unit (GPU) chips to companies training and running AI models. Last year, the German company was mulling an initial public offering at a valuation of between $10 and $16 billion, according to Bloomberg. Now it’s considering an underwhelming take-under approach from Rumble RUM.O, a video platform and cloud services outfit that hosts Donald Trump’s Truth Social.

Rumble’s interest arrived alongside a lacklustre set of Northern Data results, which documented a 95% year-on-year plunge in second-quarter sales at Taiga Cloud, its rent-a-GPU division. The company blamed an infrastructure upgrade – designed to accommodate customers with short-term computing needs – for the low utilisation of its chips. This inconsistent performance likely explains Rumble’s lowball offer of $18 per share, a discount of more than 30% to Northern Data’s last closing share price on August 8 - valuing the target at just $1.2 billion.

Northern Data’s worries – a small customer base, high operating costs and uncertain long-term demand – also stalk much larger peers like CoreWeave CRWV.O. Around the time of the $49 billion U.S. group’s March IPO, it was evident that Microsoft MSFT.O accounted for 60% of the company's 2024 revenues – leaving the group highly exposed to changes in the company’s strategy. It’s unclear when non-hyperscaler companies will ramp up demand for GPUs, and while CoreWeave shares are above their listing price, they’ve slumped 45% since late June.

Should its Northern Data deal go through, Rumble will have bought itself and its cloud customers access to at least some of the German company’s stash of 22,000 GPUs. Stablecoin operator Tether – which already owns 54% of Northern Data and 48% of Rumble – has also promised to enter a multi-year GPU rental commitment with the combined entity. On one level, it looks like Tether has made a shrewd bid to acquire in-demand computing power at a knockdown price.

However, the current deal may hinge on Northern Data’s minorities having a sufficiently pessimistic view of the near-term outlook to accept shares worth less than what they currently have, in a company closely linked to Trump. They may not want to. It’s also not immediately clear the degree to which Rumble and Tether primarily just want new rental customers for Northern Data’s GPUs and data centres, and the extent to which they’ve earmarked them for personal use.

Even if demand for what CoreWeave and Northern Data sell surges, sector players will have to source adequate power supplies and service debts incurred buying their GPUs. Rumble’s bid may offer the target’s shareholders a chance to get off the ride. Those that fancy doing so might prefer cash to owning a smaller chunk of a polarising video-sharing platform, though.

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CONTEXT NEWS

On August 11, Northern Data said it had been informed of a potential exchange offer to its shareholders by Rumble, a video-sharing service and cloud provider. The potential deal value is around $1.2 billion. Each Northern Data shareholder who tenders their shares is expected to receive 2.319 newly-issued Rumble shares apiece.

Should the bid be accepted, Northern Data’s shareholders would end up owning around one-third of Rumble’s stock. Stablecoin group Tether, the largest shareholder of both the target and acquirer, has indicated it supports the combination.

Frankfurt-headquartered Northern Data revealed in May that it had received expressions of interest from would-be buyers listed in the U.S.