Did Firmus fly too close to the sun?

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Carrington Clarke (0:40)

It was the $44 billion float that flopped. AI startup Firmus dramatically pulling the plug on what was supposed to be the second biggest listing on the ASX ever. So what the hell happened? And what does the episode tell us about investor appetite for all things AI? Welcome to ABC Business Daily.

I'm Carrington Clarke.

James Thomson (1:04)

And I'm James Thomson, Senior Chanticleer columnist at the AFR.

Carrington Clarke (1:07)

James, thank you for joining me. I mean, Firmus completely dominated the financial press last week.

James Thomson (1:13)

Yes, and this week too, I think.

Carrington Clarke (1:15)

It is an extraordinary story. I mean, the narrative looked like it was going to be this great redemption arc, particularly for Oliver Curtis, you know, comes out of prison into potentially one of the most lucrative companies in Australian history. One of the, he would have been one of the wealthiest men in the country, at least on paper to start off with.

And yet, despite the fact the company was saying at the beginning of the week that there was too much investor appetite, that they couldn't possibly even get all the people who wanted to be involved involved, it ended with kind of a fizzle. What went wrong?

James Thomson (1:47)

Well, I think a few things went wrong.

I mean, I think that the main one is that they priced the IPO too high. So, this company was worth $15 billion, say, three months ago, and they were trying for a $44 billion valuation. And I think just a number of things came together to make that valuation look too high. Essentially, it scared off investors. So, I think the first one is execution risk.

Data center capacity is measured in megawatts and gigawatts, so like energy. And Firmus had about a gigawatt of data center capacity contracted, but it had only built 50 megawatts. So, it still had to build 950 megawatts just to reach its initial contracted capacity. There's a lot of execution risk in that, a lot of things that can go wrong, construction runs over time or over budget. And so, I think people were nervous perhaps about their ability to execute on that. And the second thing that happened is, we've seen this run up in bond yields over the last, well, really the last month. And so, the cost of capital, the price of debt has got a lot more expensive. And Firmus is going to need a hell of a lot of debt over the course of its life. It was going to start life on the public markets with $30 billion in debt, but that would have just been the start.

Carrington Clarke (3:09)

You say, it basically was a valuation question, that it went from 15 billion to looking for $45 billion.

Markets are supposed to be pretty efficient, at telling you what the value of a company is. They had a lot of the best brains in Australia who were supposed to be there, helping to figure out what the appetite was, what this company is actually worth. Was it a case of the existing investors just getting greedy, as some of the headlines suggested?

James Thomson (3:33)

Well, I mean, I think ultimately the market was pretty efficient at sorting this one out.

But yes, I think the initial investors, the bankers, the advisors, they clearly overreached. I mean, this just, the scoreboard makes that pretty obvious. The thing didn't get away at $44 billion. So yes, I think they probably tried for a valuation that didn't capture some of those risks. And they couldn't win over the local fund management community. It was hard to find a local investor who was really interested at all. But the problem was eventually that they couldn't win over the US fund managers who they thought were going to back this business and back it rather fulsomely.

Carrington Clarke (4:16)

And was that what eventually killed it? That there wasn't actually the appetite from overseas investors to back this, which is why it was dead on arrival?