Nvidia-backed Firmus scraps $5 billion Australia IPO amid growing AI scrutiny

By Scott Murdoch and Christine Chen

SYDNEY, Oct 9 (Reuters) - Australia's Firmus, a data centre operator backed by Nvidia, shelved its $5 billion IPO on Friday, adding to growing investor scrutiny of the AI sector's valuations and sustainability of massive investments to build infrastructure.

Firmus said it would now opt for a private fundraising round, and a person involved in the transaction said that would be followed by a Nasdaq listing. The person could not be identified discussing information that was not public.

The company declined to comment on whether it would target a Nasdaq listing.

Firmus' IPO would have been the second-largest new share sale in Australia's history but met lukewarm demand, a warning sign that investors are becoming increasingly selective about AI issuers amid a massive round of fundraising via debt and equity.

"The company will now pursue capital from private markets and consider alternative international public market options to support its next phase of growth," said co-founders Oliver Curtis and Tim Rosenfield in a letter sent to shareholders.

"We will continue to assess opportunities that provide the best platform to fund growth, create value and position Firmus for success."

Firmus, backed by major AI companies and investors Nvidia and Coatue Management, along with Blackstone and Jane Street, designs and operates ​modular AI factories using proprietary energy and cooling technology.

The closely-watched IPO would have ranked as the fourth-largest public offering globally so far this year, behind SpaceX, CXMT Corp and Cerebras Systems, according to Dealogic data.

Its collapse is a blow to Australia's capital market, which has been grappling with a declining number of listed companies and a weak pipeline of new listings.

DATA CENTRE PARTNER'S EXIT SOWED DOUBTS

Firmus initially planned to sell shares at A$11 each, giving it an equity valuation of $30.6 billion, nearly triple the $10.5 billion it achieved following a fundraising round at the start of August.

The pricing came under pressure as investors grew concerned about the company's debt pile, its lack of a track record in building AI data centres and media reports about a key partner pulling out of an A$73 billion data centre development deal.

Firmus currently has two leased online data centres in Melbourne and Singapore and plans to build five more across the Asia-Pacific. Its draft prospectus said it would make $5 billion in annual earnings within five years from the data centres.

"They were asking for a very big price tag for what would likely be expected to happen in the future assuming near flawless execution," said Joseph Koh, a portfolio manager at Blackwattle Investment Partners.

"And I think the market wasn't comfortable taking that leap of faith quite at this stage yet," said Koh, whose firm looked at the IPO but did not bid for its shares.

The term sheet sent by the IPO book managers a few days before the deal was launched on Tuesday said indicative offers were already enough to cover the transaction.

But investors started to pull those orders on Wednesday, after CDC Data Centres CEO Greg Boorer told a podcast its plan to develop 1.6 gigawatts of AI factories with Firmus was no longer underway, two people involved in the IPO said.

Investors also baulked after being told on Tuesday the deal's escrow arrangements would have allowed more than half the stock to be sold by existing investors from day one, which could have hurt Firmus' early trading performance.

Firmus considered cutting the issue price, one of the people involved in the deal said, but opted instead to look towards a private funding round.

"It's disappointing given that three days ago we thought it was all going well ... The market has spoken," said Oscar Oberg, lead portfolio manager at Wilson Asset Management , a Firmus investor since last year.

Bloomberg reported the company was exploring raising up to $3 billion from existing investors. Firmus did not immediately respond to a request for comment on its plans.

The Firmus IPO bookbuilding was led by Bank of America, JPMorgan, Morgan Stanley and Australian broker Morgans.

VALUATION WORRIES

With debt of about $30 billion, according to analysts working for the joint lead managers, the company founded in 2019 would have had an enterprise value of $60 billion, more than some of Australia's longest-established companies.

Fund manager Ten Cap's co-founder Jun Bei Liu said the pulled deal showed a broader shift in which investors were becoming more focused on the economics of AI investments and converting infrastructure spending into returns.

"I think the Firmus situation represents an important reality check for the AI investment boom, but I wouldn't interpret it as the beginning of the end of the AI trade," Liu said.

"There are certainly Firmus-specific issues, particularly around the speed of its valuation increase, the enormous capital requirements and the execution risks associated with delivering its ambitious expansion plans."

The world's largest technology companies, including Nvidia and SpaceX, are still busy tapping debt markets for tens of billions of dollars, while Anthropic is seeking to raise as much as $100 billion in an IPO.

But in the latest sign of investors' concerns about returns from AI, US-listed chipmakers, which have soared over 80% so far this year, fell 3.4% on Thursday in the wake of media reports that OpenAI has told investors its annualised revenue for September was almost $50 billion, a drop from what it signalled earlier.

(Reporting by Scott Murdoch, Christine Chen and Renju Jose in Sydney; Editing by Sonali Paul, Sumeet Chatterjee, Kevin Buckland and Kim Coghill)