Oracle’s Data Center Challenge as Trump, Xi Talk AI

SPEAKER_1 (0:02)

Bloomberg Audio Studios, Podcasts, Radio, News. Bloomberg Tech is live from the heart of Silicon Valley with Ed Ludlow in San Francisco.

Ed Ludlow (0:22)

This is Bloomberg Tech. Coming up, force majeure, Oracle moves to protect itself from mounting costs on a massive Mexico data center facing regulatory setbacks and local opposition. Plus, it looks like a tamagotchi and fits in the palm of your hand. We're going to discuss Meta's new device for using its popular new AI assistant, Muse, and all eyes on President Trump and China's Xi Jinping, who are moments away from holding a bilateral meeting where AI is expected to be top of mind. Let's get right to our top story and shares of Oracle down more than 5%.

At one point in the session, down 7% on track for their biggest decline since mid-June. This, after Bloomberg reports, the company sent a letter to the developer of a massive data center being built in New Mexico, citing force majeure. That's all according to sources. The move could help shield the tech giant from racking up expenses on a project that has been beset by delays. Let's get the details with Bloomberg Sridhar Nanarajan, who is part of the team that broke the story. Let's get into the specifics.

The parties involved, this site, and I'm sure lots of people understand force majeure, but the basic concept here.

Sridhar Nanarajan (1:29)

Again, so let's set the stage here. We're talking about this massive data center campus, this data center build out that's taking place in southern New Mexico, beautiful part of the country, borders Mexico in a rural county. It's a 1400 acre campus.

But with such a big development, what you've seen is also a lot of local opposition and regulatory headaches, which has proved to be a problem for all the parties involved. Now, who are the parties involved? Stack Infrastructure, which is a portfolio company of Blue Owl, which is the data center developer. Oracle, which has agreed to be the tenants, which will be leasing the compute that will come up at this data center facility. And the issues that these parties face is what happens if this project continues to be delayed, because there have been a lot of financial resources already poured into this, and a lot more to come down the pike. So it's important to clarify for our viewers and listeners, what this is and what this isn't. This isn't Oracle throwing up his hand and saying it is walking away from this project. I would see this as a defensive move, as a preemptive move to send out this notice to Stack Infrastructure, to Blue Owl, and tell them that if the project does get delayed, it hopes to wriggle out of certain financial obligations and commitments.

It's not clear whether this contractual maneuver would necessarily work, and they would not be on the hook for those payments, but that is the effort by Oracle here, because the delays are visible. There's permitting delays. There are other issues. And in some ways, this project, so-called Project Jupiter in New Mexico, is a microcosm for all the problems facing the data center build out across the United States, whether you're talking about the battleground states or places like Northern Virginia, in fact, everywhere in the country right now.

Ed Ludlow (3:15)

Oracle did respond to our request for comment, and then they've posted that response publicly. Let's go through it. I mean, what is their line on what's happening with Project Jupiter?

Sridhar Nanarajan (3:24)

And what they have posted is consistent with our understanding of it. In an ideal world, Oracle would want this data center to come up as soon as possible. It remains committed to the project. It has addressed the backlash that has faced in the local community and tried to put forward its own argument for why this will be beneficial. They have pointed out the financial incentives, they pointed out to the workforce coming into the area and how in general it will be beneficial to the broader economy. We must also point out that Blue Owl has gone on the record and said that this notice does not change the multi-year financial commitments. So one has to assume that Blue Owl is trying to convey to its investors and markets that just because a notice has been sent doesn't mean that the certain financial obligations do not have to be met.

Ed Ludlow (4:12)

Okay, so Blue Owl owns Stack, which is the developer. I want to get into the financing very quickly because there's a loan here backed by lots of banks, very quick.

Sridhar Nanarajan (4:21)

That is why we're talking about what are the financial anxieties here. A group of about 20 banks committed $18 billion in loans for this project. Now, we do get to see some of the private market trading. Now, this is not liquid active trading, but there is some movement and these loans have already been trading below $0.90 on the dollars. That might not be distress levels, but that certainly implies some level of stress. If you're a lender in a project like this, which under ordinary circumstances is supposed to be money good, this is not the level where you would like to see the loans at.